Better Artificial Intelligence Stock: AMD vs. Nvidia

Artificial intelligence (AI) has been a hot sector to invest in, helping the stock market reach new highs in 2024. Two of the biggest beneficiaries from the rise of AI are semiconductor giants Advanced Micro Devices (NASDAQ: AMD) and its chief rival Nvidia (NASDAQ: NVDA).

Both sell graphics processing units (GPUs), the hardware used in data centers to enable artificial intelligence. AI systems must sift through mountains of data, and the GPU is the component that makes this data-intensive task possible.

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GPU sales propelled AMD and Nvidia revenue to record highs. The pair is positioned for more growth as tech companies construct data centers to house AI systems. For instance, Facebook parent Meta Platforms is building a data center the size of a small city.

The amount of hardware required for such gigantic data centers suggests AMD and Nvidia's future sales growth is likely to remain high, so owning shares in both is ideal. But if you had to choose just one, which semiconductor company is the better AI investment for the long haul? Here's a look at each to arrive at an answer.

Reasons to invest in AMD

AMD's sales growth has been remarkable due to the current AI frenzy. To give you a sense for what that means, in its fiscal fourth quarter ended Dec. 28, the company's sales to the data center market increased 69% year over year to a record $3.9 billion. This helped AMD's total Q4 revenue to grow 24% year over year to $7.7 billion.

The firm also boasted a strong Q4 balance sheet. Its total assets of $69.2 billion eclipsed total liabilities of $11.7 billion.

Despite these excellent results, AMD stock has been declining for weeks. This began in earnest after Wall Street was rattled by the appearance of Chinese AI start-up DeepSeek on Jan. 27. DeepSeek purportedly produced an AI chatbot for less than $6 million. That's a fraction of the billions of dollars spent by U.S. firms to build their AI, raising concern AMD's sales could falter.

On this topic, AMD CEO Lisa Su stated, "Specifically relative to DeepSeek, look, we think that innovation on the models and the algorithms is good for AI adoption." In short, she believes lower-cost AI means more organizations can afford to adopt the tech, translating into increased customer demand for AMD products over the long term.

The case for Nvidia

Nvidia stock was not immune to DeepSeek's arrival, dropping alongside its semiconductor brethren. Nvidia shares have since bounced back, which makes sense because its business shows no signs of slowing down.

In its fiscal third quarter ended Oct. 27, the company's revenue reached a record $35.1 billion, a 94% year-over-year increase. Like AMD, Nvidia's spectacular sales gains were thanks to its data center business. This division contributed $30.8 billion in Q3 sales, representing 112% year-over-year growth.

Nvidia's sales are expected to continue rising. The company forecast fiscal Q4 revenue of about $37.5 billion. That's a 70% jump from the prior year's $22.1 billion. The company reports its Q4 results on Feb. 26.

Moreover, Nvidia is a participant in the U.S. government's Stargate program, which plans to invest half a trillion dollars into AI infrastructure. This should boost Nvidia's revenue growth further as the project unfolds.

The company's sales success led to strong financials. Nvidia's Q3 balance sheet included $96 billion in total assets versus $30 billion in total liabilities. Its Q3 gross margin of 75% was excellent, far better than AMD's Q4 margin of 51%. This metric indicates Nvidia's effectively managing costs, thereby improving profits.

Choosing between AMD and Nvidia

Both AMD and Nvidia offer reasons to invest, given their healthy businesses and rising sales. So let's turn to another key consideration to decide between the two: valuation.

To do so, we'll use the price-to-earnings (P/E) ratio, a metric which tells you how much investors are willing to pay for a dollar's worth of earnings.

Data by YCharts.

AMD's P/E multiple has dropped substantially over the last year, indicating it's a better value now than in the past. This decline reflects the fall in its share price, which took a hit not only due to DeepSeek's arrival, but also because its Q4 data center results failed to meet Wall Street's lofty expectations.

Despite the drop, in comparing AMD's P/E ratio to its rival, it's still more than double Nvidia's at the time of writing. This makes Nvidia stock the better value.

Also, while I admire AMD's Lisa Su, Nvidia's prescient CEO and founder, Jensen Huang, foresaw the need for GPUs back in 1999, which established his company as the leader in the space. Now Nvidia dominates the AI semiconductor market with an estimated GPU market share of 90%.

Huang also recognized the GPU was applicable to AI, giving the first supercomputer specifically designed for artificial intelligence to OpenAI in 2016. OpenAI then went on to create ChatGPT, setting off the current AI frenzy.

When you put together Jensen Huang's visionary leadership, Nvidia's track record of AI success, and its superior stock valuation, Nvidia comes out the winner as the better long-term investment in AI.

Should you invest $1,000 in Nvidia right now?

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Robert Izquierdo has positions in Advanced Micro Devices, Meta Platforms, and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Meta Platforms, and Nvidia. The Motley Fool has a disclosure policy.