AMD and Nvidia Split the AI Chip Market. 1 Stock Is Far Cheaper Today.

Advanced Micro Devices (AMD) and Nvidia are leading players in the artificial intelligence (AI) chip market. Their GPUs are widely used, and each company's market share is rapidly expanding. However, when it comes to investment opportunities, the two are fundamentally different, particularly in terms of price. Despite this, Nvidia appears to be the superior buy, but there are additional factors to consider.

Both AMD and Nvidia manufacture GPUs, which are versatile computing units capable of excelling in a wide range of tasks. While custom AI chips are becoming increasingly popular, GPUs are still the backbone of the AI computing landscape. Nvidia initially dominated the AI market, but AMD has been catching up. However, due to Nvidia's early lead, it has been difficult for AMD to surpass it.

Nonetheless, larger companies tend to have slower growth rates, so AMD's smaller size could potentially allow it to grow faster than Nvidia. In reality, this isn't happening. Nvidia's data center division, which is more exposed to AI, generated $89 billion in revenue during the second quarter of its fiscal year 2027 (ending on July 26).

AMD's data center division, on the other hand, brought in $6.7 billion during Q2 (ending on June 30). Although their financial calendars are about a month apart, this comparison is the best available. With AMD's data center division being more than 10 times smaller than Nvidia's, it should have an easier time growing faster. However, Nvidia's Q2 growth was 117%, compared to AMD's 107%.

Both companies are performing well, but Nvidia is growing at a faster pace. AMD and Nvidia also have non-data-center segments, but Nvidia's other businesses are smaller, with data center revenue accounting for the majority of its total revenue of $96.2 billion. AMD's Q2 revenue was $11.5 billion, so its other divisions make up a larger percentage of its revenue.

Due to the significant growth disparity, investors might expect Nvidia to have a higher valuation than AMD, as it is growing faster. However, this is not the case. Forward earnings valuation suggests that AMD is approximately three times more expensive than Nvidia, which seems illogical but is how the market is pricing these stocks.

This discrepancy could be corrected by a sell-off of AMD shares or a rise in Nvidia's stock. Nonetheless, Nvidia is likely to outperform AMD in the long run due to its broad exposure to the AI arms race, which should drive the stock higher over the next few years.