AMD (NASDAQ:AMD) just delivered yet another strong earnings beat yet provided typically cautious guidance looking ahead once again. Meanwhile, major AMD stock rival, Nvidia (NASDAQ:NVDA), has been posting blowout results fueled by rampant AI chip demand and giving bold projections for massive growth ahead.
In my view, AMD now looks like the superior chip stock to own for the long term versus NVDA, which trades at sky-high valuations. While NVDA is executing amazingly currently, I believe AMD offers a better risk-reward outlook.
AMD Executing Well, but Is the Valuation Reasonable?
There is no doubt AMD is executing tremendously right now, as evidenced by its latest top and bottom line beat driven by server and PC chip strength. However, management only guided conservatively higher for the next quarter, continuing its trend of strong upside results but cautious outlooks.
This contrasts sharply with NVDA, which has posted simply eye-popping numbers quarter after quarter recently, driven largely by booming demand for its AI accelerators. Bulls are expecting NVDA’s data center chip sales to double next year, with its forward P/E ratio still above 41x.
In my opinion, it will be highly challenging for NVDA to fully achieve its multi-year targets for AI chip dominance and growth. There remains a tremendous amount of uncertainty regarding the total addressable market size for AI chips and whether the margins will prove sustainable in the long term.
Meanwhile, NVDA still trades at a nosebleed valuation of over 20x forward sales, pricing in the AI euphoria being realized to the fullest extent. Any major hiccups or stumbles could spell big trouble for the trillion-dollar chip giant.
Mounting Competition Could Place AMD in Line for the AI Lead
Additionally, I expect mounting competition to emerge in the AI chip space over the next few years, especially from AMD. Many NVDA bulls continue dismissing this threat, but AMD has a proven track record now of bringing solid competition to the table after its success in CPU and server chips versus Intel (NASDAQ:INTC).
With AMD’s transformative acquisition of Xilinx last year, it gained a strong foundation on the FPGA and software side to build up its AI chip capabilities. I believe AMD has both the talent and roadmap to start chipping away at NVDA’s AI chip dominance.
Certainly, NVDA still holds a commanding lead for now, especially in the highest-end accelerators. But many said the same about Intel’s server chips just a few years ago. Now, AMD has managed to take a significant market share in that category.
Meanwhile, AMD still trades at a very reasonable valuation of just 8x forward sales, which seems attractive for a company with strong growth prospects. If AMD can execute even moderately well in ramping up its AI chip business alongside its server chips, its EPS growth could swell rapidly in the coming years.
Many bullish analysts see over 30% annual earnings growth potential for AMD over the next five years. That could put AMD’s forward P/E ratio somewhere below 13x for 2027 profits if realized. To me, AMD’s risk-reward outlook seems vastly superior currently compared to NVDA’s sky-high valuations.
My Verdict: AMD Offers More Realistic Upside Potential
To summarize, my current verdict is that AMD presents a far more favorable risk-reward profile in comparison to NVDA stock right now. AMD has executed tremendously well lately yet still trades at a very reasonable valuation.
It offers truly enormous profit growth potential ahead if it can gain even moderate market share in AI chips to complement its growing server CPU business. Meanwhile, near-flawless execution for years seems already priced into NVDA at current levels.
Its premium valuation leaves little to no margin for error, especially as I expect competitors led by AMD will fiercely vie for share in the exploding AI chip market. NVDA will likely retain its clear lead for now, but market dynamics invariably shift over time. Simply put, paying 8x sales for AMD seems like a superior bet over 20x sales for NVDA when considering future growth prospects. The forward earnings multiple is very similar in the near term, but it also starts to favor AMD in a multi-year timeframe.
The Bottom Line
In short, AMD stock at current levels offers a promising opportunity for substantial long-term gains if execution remains solid. Meanwhile, it’s unclear whether pricy NVDA can generate enough sustained growth to justify its near $1 trillion valuation.
Naturally, it’s improbable that NVDA fully collapses anytime soon. But the risk-reward profile appears skewed to the downside at today’s heights. I believe AMD provides a far better risk-reward setup for tech investors searching for a realistic upside.
On the date of publication, Omor Ibne Ehsan did not have (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.
