Advanced Micro Devices (NASDAQ:AMD) has performed well since the start of the year. However, the performance of AMD stock is well behind that of its chief peer, Nvidia (NASDAQ:NVDA). While AMD has rallied by around 44.5% since January, NVDA is up by nearly 89% during this time frame.

There’s a good reason for this. So far, Nvidia appears to be winning the artificial intelligence (or AI) battle. Hence, this rival appears poised to benefit the most from the rapid adoption of generative AI.

But beyond just the fact that AMD isn’t exactly “left in the dust” when it comes to AI, there’s another reason why it’s a better buy among chip stocks than NVDA.

That would be valuation relative to its growth prospects. This factor may mean shares have a lower downside risk and greater long-term upside potential than NVDA.

AMD Stock: An AI ‘Also-Ran?’ Not Exactly

With Nvidia making considerably greater progress in capitalizing on the rising use of semiconductors for AI applications, you may have concerns that this threatens to render Advanced Micro Devices an AI “also ran” permanently.

Yet much like the situation with Alphabet (NASDAQ:GOOG, GOOGL), which has fallen behind Microsoft (NASDAQ:MSFT) in the area of AI-assisted search, AMD is quickly playing catch up. CEO Lisa Su is confident about the potential of the company’s MI300 “superchip,” set for release later this year.

Sure, some sell-side analysts covering AMD stock are skeptical that the MI300 will be a silver bullet, enabling Advanced Micro Devices to grab a piece of this market. However, even if the company cannot overtake Nvidia in terms of AI-related market share, being number two doesn’t leave the company vulnerable to becoming an “AI loser.”

Growing demand for these chips far outweighs this market-share negative. Even as the second-largest AI chipmaker, this company is well-positioned to profit. In short, while AMD’s AI catalyst isn’t as strong as Nvidia’s, this trend is still a tailwind, not a headwind.

What Makes the Stock a Better Buy

While the AI megatrend is good news rather than bad news for Advanced Micro Devices, that’s not what makes its shares a better buy relative to Nvidia. Again, the key factor that makes AMD stock a better buy than NVDA stock is valuation-based.

Based on earnings forecasts for the current fiscal year (calendar year for AMD, fiscal year ending January 2024 for Nvidia), the former is cheaper than the latter. AMD trades for 30 times forward earnings, whereas Nvidia trades for around 60.1 times forward earnings.

This comes despite Nvidia having a lower expected earnings growth (around 32.7%) for the following fiscal year than AMD (around 39%). Sure, I have recently argued that NVDA has the potential to sustain (and grow) its current valuation due to the strength of its AI catalyst.

However, while I believe it’s possible, it’s hardly a lock. My bull case for NVDA hinges on a rebound in tech (and, therefore, a rebound in overall chip demand) that happens on or ahead of schedule. Even if you’re confident this plays out, AMD is a much better way to make this wager.

Bottom Line

Advanced Micro Devices offers investors a much better risk/return proposition than Nvidia.

If the rebound takes longer than expected or the slowdown gets worse in 2023, expect a downward revision in earnings for both companies.

However, a downward revision to earnings will have a far greater impact on more richly-priced NVDA than on relatively cheap AMD.

If the tech comeback takes shape this year, AMD has much more room to run. Not only could shares rally in tandem with an earnings rebound.

The stock could benefit from multiple expansions. MI300’s launch could make it a more formidable AI play in the eyes of investors.

If you are less confident about the tech sector’s prospects, you may want to stay away from both names, but if you’re bullish that the chip space stands to make a further recovery, choose AMD stock.

On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.