Prediction: AMD Stock Could Outrun Nvidia Over the Next 3 Years -- Here's the Bull Case

Nvidia (NASDAQ: NVDA) has been the artificial intelligence (AI) chip company leading this technology revolution so far. This is for two reasons: The company got in on the space early, and its commitment to innovation has kept it in the top spot. And investors, excited about Nvidia's soaring earnings, have piled into the stock, seen as a no-brainer AI winner.

These days, however, Nvidia isn't the only chip company positioned to benefit from the AI market, one on track to reach into the trillions of dollars. In fact, another player is making significant progress, and this player is Advanced Micro Devices (NASDAQ: AMD).

Over time, AMD has become a leader in central processing units (CPUs), the chips that power computers, but in recent quarters, the company is proving its strength in AI chips too -- and investors have recognized it. So far this year, AMD stock is outperforming Nvidia. Now, my prediction is AMD stock could outrun Nvidia over the next three years -- here's the bull case.

Image source: Getty Images.

Nvidia's early start

So, first, a bit of background. As mentioned, Nvidia entered this market early and began tailoring its graphics processing units (GPUs) to suit AI about a decade ago. Over the past few years, revenue has taken a tremendous leap as sales of AI chip systems soared. For example, in the second quarter three years ago, revenue came in at $13 billion -- in the recently completed second quarter, that number reached $96 billion.

AMD truly revved up its AI ambitions about three years ago with the launch of the next-generation Instinct MI300 data center GPU family, a clear move into the data center market. Like Nvidia, AMD committed to frequent updates of its AI accelerators, and the company's Helios platform, launched this year, represents a big step forward. This full rackscale infrastructure system "sets a new competitive bar," according to AMD, which says it's designed to deliver more compute and memory capacity than Nvidia's Vera Rubin NVL72 rack.

A look at AMD's data center revenue growth shows that customers are taking notice -- and jumping on board. For the 2023 full year, AMD's data center revenue totaled $6.5 billion. Today, that's just under the company's data center revenue for one quarter -- in the second quarter, it reached $6.7 billion, more than doubling year-over-year.

Investors are noticing AMD

And as I mentioned earlier, investors are noticing too, and they like what they see. This has helped AMD stock outperform Nvidia so far this year -- with the companies climbing 123% and 23%, respectively. Now, one particular negative point for AMD at the moment is that the gains have pushed valuation considerably higher, to a level that I consider expensive. And this is while Nvidia stock looks dirt cheap given the company's track record and long-term prospects. This may hold back value-oriented investors from buying shares in AMD.

AMD PE Ratio (Forward) data by YCharts

Still, my prediction is that aggressive investors looking for a bold AI growth story may continue buying AMD stock even at these high valuation levels, and here's why. I think these investors will focus on revenue growth figures, and here, it's likely that AMD will surpass Nvidia. It's important to keep in mind that it's more difficult to grow in the high double-digits or triple digits when quarterly data center revenue is nearly $90 billion -- and this is the challenge Nvidia faces right now. It's more complicated for the company to deliver explosive revenue growth quarter after quarter because it already generates enormous revenue and dominates the market.

AMD, however, has plenty of room for growth -- and the company can achieve this without truly upsetting Nvidia's market position, considering the level of demand for AI systems. AMD chief Lisa Su has offered words that spur optimism: "We are still in the early innings of a multiyear AI adoption cycle, and the opportunity ahead is enormous," she said in the recent earnings call.

So, as AMD's revenue jumps in the coming quarters, investors are likely to continue piling into the stock. And that's why I predict AMD stock could outrun market leader Nvidia over the coming three years.

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.