Can AMD Outperform NVIDIA? Let's See if the Stock is Worth Buying Now

Advanced Micro Devices, Inc. AMD has become a dominant player in the data center business. It is contending with NVIDIA Corporation NVDA in the graphic processing units (GPUs) market and has acquired some of the latter’s top clients. 

Does this mean AMD stock has the wherewithal to outperform the Wall Street darling NVIDIA in the long run and is an enticing buy? Let’s find out –  

AI Spending Boosts AMD & NVIDIA

The surge in artificial intelligence (AI) adoption has provided a significant boost for NVIDIA and AMD. With just 10% of businesses in the United States currently utilizing AI, there exists considerable potential for long-term growth. 

According to McKinsey, revenues from AI software and services are projected to range from $1.5-$4.4 trillion by 2040. This is encouraging news for NVIDIA, as its GPUs are essential for AI applications. With its leading position in the GPU market, NVIDIA has a competitive advantage. 

Despite NVIDIA’s pricing power, its smaller rival AMD has benefited from the burgeoning data center GPU market. Presently, AMD is a strong competitor to NVIDIA in the GPU market, benefiting from recent customer deals.

Can AMD Outpace NVIDIA?

Talking about GPUs, NVIDIA’s dominance in this space has made its products pretty pricey. Therefore, very few companies have the monetary strength to acquire NVIDIA’s hardware on a persistent basis. Rightly so because some of the magnificent-7 stocks, such as Alphabet Inc. GOOGL, Meta Platforms, Inc. META, and Tesla, Inc. TSLA, are NVIDIA’s customers.

This means AMD can compete with NVIDIA on price and cater to companies that can’t afford to spend billions of dollars. Big companies, too, are finding ways to build their AI infrastructure cost-effectively. That’s why, AMD’s MI300X chips are being used by Microsoft Corporation MSFT and Meta. 

Oracle Corporation ORCL has also signed a multi-billion dollar contract with AMD for 30,000 of their latest MI355X GPUs. These chips can provide 35X more performance than the previous CNDA 3 chips, such as the MI300X, and pose serious competition to NVIDIA’s next-generation Blackwell chips. 

Overall, in 2024, AMD garnered revenues of $25.8 billion, of which $12.6 billion was from its data center business, up a staggering 94% from a year ago. Thus, with AMD’s data center business finishing a record year and more growth expected, its shares are set to rise. 

However, suggesting that AMD shares will surpass NVIDIA is implausible. NVIDIA itself is expected to gain significantly from its AI advances, strengthening its competitive moat (read more: Which AI Stock, NVIDIA or Palantir, Has More Upside and Is a Buy?).

Is AMD Stock a Buy Now?

AMD’s growing data center operation and increasing clientele in its GPU business should entice its existing stakeholders to hold onto the stock for solid gains. 

Additionally, from a valuation perspective, AMD stock is too cheap to discard. This is because, per the price/earnings ratio, AMD stock trades at 22.4X forward earnings. In comparison, NVIDIA’s forward earnings multiple is 25.06.

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However, despite AMD stock trading at a bargain, it faces numerous challenges. Revenues from AMD’s gaming and embedded segments shrunk last year, while the company continues to face stiff competition from Intel Corporation INTC in the traditional computing market. Until and unless these issues are addressed, new entrants should avoid betting on AMD stock.

For now, AMD has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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