Nvidia vs. AMD: Navigating the AI Chip Market Battle

Nvidia‘s (NASDAQ: NVDA) stock has skyrocketed 2,750% over the last five years, fueled by the booming artificial intelligence (AI) sector. Once primarily focused on gaming GPUs for personal computers, Nvidia has shifted gears significantly as the demand for generative AI platforms has surged. This shift has increased sales of its high-end data center GPUs, which excel in processing complex AI workloads more efficiently than traditional CPUs.

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Comparing Nvidia and AMD: Business Models and Market Positions

Nvidia and AMD operate as fabless chipmakers, outsourcing production to external foundries like Taiwan Semiconductor Manufacturing Company. Despite this similarity, their business strategies differ. Nvidia earns the majority of its revenue from discrete GPUs, with a remarkable 87% of its recent quarterly earnings coming from the data center market. The remainder stems from sectors such as gaming, visualization, automotive, and OEM services.

On the other hand, AMD sells a variety of products, including x86 CPUs, discrete GPUs, and APUs, which combine CPUs and GPUs into a single unit. The company further diversified its offerings with the acquisition of Xilinx in 2022. In its latest quarter, AMD earned 48% of its revenue from its data center business, which features Instinct GPUs and Epyc CPUs.

Recent data from JPR indicates that Nvidia commands an impressive 88% of the discrete GPU market, while AMD holds the remaining 12%. According to TechInsights, Nvidia dominated the data center GPU market with a staggering 98% share last year.

In the x86 CPU arena, AMD still struggles against Intel, holding 36% of the market share as opposed to Intel’s 61%. Nevertheless, AMD has steadily gained ground over the past eight years as Intel faced numerous challenges, including chip shortages and production delays.

Nvidia adopts a strategy of offering higher-priced, more efficient chips, contrasting with AMD’s approach of providing lower-cost yet less energy-efficient alternatives. This pricing strategy is evident as Nvidia’s H100 GPUs are priced approximately four times higher than AMD’s MI300X Instinct GPUs.

Growth Trajectories: Nvidia vs. AMD

Historically, both Nvidia and AMD have been reliant on the cyclical PC market. However, Nvidia has successfully reduced its dependence on this sector due to its rapidly growing data center business during the rise of AI technologies. In contrast, AMD continues to rely significantly on the fluctuating PC market, making it more vulnerable to recent downturns.

Analysts project that from fiscal 2024 to fiscal 2027, Nvidia’s revenue and earnings per share (EPS) are expected to grow at compound annual growth rates (CAGR) of 51% and 56%, respectively. This is attributed to the heightened demand for its data center chips, which consistently outstrip the company’s supply. Although Nvidia’s chips carry a higher price tag, their energy efficiency makes them particularly appealing to data center operators facing substantial power consumption issues.

Meanwhile, AMD’s revenue is anticipated to grow at a CAGR of 20% between 2023 and 2026, supported by a stabilizing PC market and the expansion of its data center offerings. Interestingly, AMD’s EPS is projected to leap at a CAGR of 102%, thanks to an increasing share of higher-margin products. The company is also expected to benefit from economies of scale in its data center business, especially as it integrates its Epyc CPUs, Instinct GPUs, and Xilinx’s programmable chips.

Investment Value: Nvidia or AMD?

Currently, neither Nvidia nor AMD appears to be a bargain. Nvidia shares trade at 38 times next year’s estimated earnings, while AMD’s forward multiple is higher at 44. However, Nvidia seems more reasonably priced when considering its long-term growth outlook compared to AMD. It is likely to continue leading the market, providing essential tools for businesses entangled in the AI boom.

While both companies offer better investment prospects than Intel in the semiconductor industry, Nvidia remains the stronger option for those looking to capitalize on the growing AI sector. Its rapid growth and focus on data center technology could position it as the preferred provider for companies enhancing their AI capabilities.

Considerations for Investing $1,000 in Nvidia

Before making a purchase in Nvidia, take note of the following:

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Reflect on Nvidia’s past. When it was recommended on April 15, 2005, a $1,000 investment would now be worth approximately $867,372! *

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*Stock Advisor returns as of October 28, 2024

Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool also recommends Intel and has a position in the following options: short November 2024 $24 calls on Intel. The Motley Fool maintains a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily represent the views of Nasdaq, Inc.