Why I Continue to Prioritize AMD Stock Over Nvidia

In June 2022, I made what was likely a mistake by choosing to buy Advanced Micro Devices (NASDAQ: AMD) stock over Nvidia (NASDAQ: NVDA). It was a cheaper stock in terms of valuation, and this was before Nvidia's "ChatGPT moment," when the market discovered the power of Nvidia's AI accelerators.

Also, buying AMD is only a mistake in a relative sense. It is still up around 560% from my initial buy price, less than the approximate 1,240% gain in Nvidia but far above the S&P 500's gain.

Moreover, although I would choose Nvidia over AMD if I could go back in time, I plan to stick with AMD going forward. Here's why.

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AMD rising

When I think of AMD and Nvidia, I think of Jack Welch's adage that a company should be either No. 1 or No. 2 in a given industry to succeed. In this case, I feel AMD is a solid No. 2. Although Nvidia pioneered and continues to innovate in the AI accelerator industry, AMD has closed much of the gap, one that is on track to narrow further with the upcoming release of the MI450.

Taiwan Semiconductor Manufacturing produces it on its 2-nanometer process, compared to Nvidia's 3nm process for its competing Vera Rubin platform. It is also expected to ship with 432 GB of HBM4 memory, compared to 288 GB for Vera Rubin. AMD is also expected to come with a lower total cost of ownership, according to some analysts.

Indeed, for now, Nvidia's current architecture holds the advantage. Also, such advancements are unlikely to unseat Nvidia as the market leader even if analyst assessments of the two platforms prove correct. Additionally, even if AMD gains the anticipated technical edge, it could prove temporary as both companies continue to innovate.

How the stocks compare financially

Furthermore, on the surface, Nvidia continues to deliver financial growth. In the first quarter of fiscal 2027 (ended April 26), revenue grew 85% from year-ago levels. AMD's fiscal quarters follow the calendar year, so it is not a perfect comparison. Its revenue increased by a robust but significantly slower 38%.

Investors should also remember that the data center segment, which includes AI accelerators, accounts for 92% of overall revenue, compared to 56% for AMD. However, AMD's market capitalization is $850 billion, a small fraction of Nvidia's $4.9 trillion, causing possible headwinds from the law of large numbers.

Even if one considers Nvidia stock a buy, investors should remember that it is the only company to grow to a market cap above $4.9 trillion, and a tenfold increase in the stock price would take the market cap to $49 trillion! That may be difficult to imagine in a world where no company has yet reached $6 trillion in market capitalization.

In comparison, a tenfold increase in AMD takes the market cap to $8.5 trillion. AMD's current size will also make it somewhat difficult for its stock to rise by that much, though the market is on track to set new market cap records as more investors turn to these larger AI stocks.

Admittedly, neither stock is subject to a formal limit on market cap growth. Still, that difference strongly suggests it will be easier for AMD's stock price to rise than Nvidia's, likely making AMD more attractive to growth investors.

Moreover, these headwinds are likely already affecting Nvidia with its valuation. Nvidia's P/E ratio is only 31, compared to AMD's 171, which appears less affected. The difference narrows with the forward P/E ratio, where AMD's 71x is closer to Nvidia's 23x.

Those higher multiples from AMD are also likely built on a belief that the MI450's release will meet or exceed market expectations. If the MI450 sells as anticipated, AMD may be in a better position to command and retain that valuation premium, at least until its market cap catches up to Nvidia's.

AMD vs. Nvidia

Amid these facts, I will hold my AMD stock in anticipation that it will grow faster than Nvidia. Admittedly, Nvidia holds the edge in the AI accelerator market, and with its higher revenue growth and a low P/E ratio compared to that growth (and to AMD), investors should anticipate continued stock price appreciation.

Unfortunately for Nvidia, growth investors tend to want to see the potential for tenfold or more growth. That is likely to motivate them to take an interest in other stocks, possibly slowing Nvidia's stock price appreciation relative to its revenue growth.

AMD is not completely immune to these effects, as its market value would break current records if it were to increase by 10x. Nonetheless, it is still small enough that AMD may grow faster if the MI450 and subsequent chip releases make it more competitive with Nvidia. Thus, among chip stocks, AMD stock appears to hold more potential for appreciation over time.

Will Healy has positions in Advanced Micro Devices. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.