AMD vs. Nvidia Stock: One Metric Tells Me Which Is Clearly the Better Buy

AMD (NASDAQ: AMD) and Nvidia (NASDAQ: NVDA) are two stocks that are often compared. It makes sense, as these two are the top dogs in the graphics processing unit (GPU) space. GPUs have been the primary computing chip utilized for artificial intelligence (AI) training and computing up to this point, and they'll likely maintain a dominant hold on this industry because of their ability to handle a variety of workloads and data sets.

Nvidia has been the biggest winner and has become the world's largest company by market cap. However, over the past year, AMD has been the better investment. Its stock has risen over 350%, while Nvidia's is up nearly 60%. Nvidia investors are happy with a strong return like that, but they'd be lying if they told you they weren't a little jealous of AMD's return.

Nobody can go back in time and reverse their investment decision; all that remains is to look at which is the better investment going forward. I believe there's a clear metric that informs me which is the better buy, and it's not even close.

Image source: The Motley Fool.

AMD's rise hasn't been backed by similar business gains

When comparing stocks, I look at two key factors: growth and valuation. I want to ensure that a highly valued company has the growth to back it up. On the flip side, if I can find a stock that doesn't have a premium valuation, yet is rapidly growing, then it's a sign that the stock could be worth buying.

The primary valuation metric I use when comparing stocks like AMD and Nvidia is the forward price-to-earnings ratio, as it includes future growth expectations, which are vital considering the massive amount of growth both are experiencing. From this standpoint, Nvidia clearly looks like a better buy.

AMD PE Ratio (Forward) data by YCharts

With AMD trading at 70 times earnings and Nvidia trading at 24, AMD's stock is essentially 3 times as expensive as Nvidia's. That's a huge premium to pay, and that mismatch extends into the next fiscal year as well.

AMD PE Ratio (Forward 1y) data by YCharts

So, even after AMD's 2027 earnings are accounted for, it's still far more expensive than Nvidia. Now, if AMD has the growth to back that up, then I'd say the premium could be worth it. But Nvidia is outgrowing it, and it's not particularly close.

AMD Revenue (Quarterly YoY Growth) data by YCharts

This makes me far more bullish on Nvidia's future, and I believe it's the better stock to buy right now.

Keithen Drury has positions in Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.