Forget AMD: 2 Tech Stocks to Buy

Advanced microdevices (AMD 2.11%) has a strong role in technology, supplying its chips to companies in the industry. Its hardware powers everything from video game consoles to cloud platforms, personal computers, laptops and consumer-built AI models. As a result, AMD has formed profitable partnerships with companies such as Microsoft (MSFT 0.97%), Sonyand Meta platforms.

AMD’s success over the years has seen revenue and operating income rise 224% and 45%, respectively, since 2019. Meanwhile, its stock has risen 384% over the past five years. The company boasts a long history of growth and a solid outlook as it expands into high-growth sectors such as AI.

However, a rally over the past year and a business that has only recently started reaping returns on its significant investment in AI means its stock isn’t exactly a bargain.

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When you consider the price-to-earnings (P/E) ratios of some of the most prominent names in AI, including three chipmakers and two top cloud providers, AMD has the highest P/E of these companies, indicating that its stocks offer the least value.

AMD’s P/E may prove insignificant over the long term, as the company’s stock will likely continue to rise as the technology industry expands. However, for anyone looking for a bargain, it might be best to avoid AMD for now.

So forget about AMD this month and consider buying these two tech stocks.

1. Nvidia

Nvidia (NVDA 1.51%) it’s not a flashy value with a P/E of 74. However, its stock remains a compelling option with a lower P/E than rivals AMD and Intel and a majority market share in AI.

Chip stocks are one of the best ways to invest in technology, with their hardware crucial to the industry’s development. Advances in chip technology have supported countless markets over the past decade, fueling innovation in cloud computing, virtual/augmented reality, data centers, consumer technology, gaming, and more. As a result, the demand for chips has skyrocketed in recent years.

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As chipmakers, Nvidia and AMD have enjoyed solid earnings over the past half-decade thanks to increased chip sales. While both companies have seen stellar growth, it’s hard to ignore how much Nvidia’s earnings and stock price have risen compared to AMD’s. Nvidia has also proven to be more reliable, with its earnings and stock rising steadily, while AMD has experienced more volatility.

Nvidia’s success is largely due to its dominance in graphics processing units (GPUs), which are high-performance chips capable of multitasking. GPUs are essential for training AI models and powering data centers. As a result, the AI ​​chip market is expected to reach $71 billion this year, with Nvidia hardware accounting for about 90 percent of the industry.

Nvidia has a strong presence in the technology, and its business will likely continue to expand as demand for its chips increases. This year, the company achieved free cash flow of $39 billion, significantly outperforming AMD by just over $1 billion. Nvidia has the financial resources to continue investing in AI and maintain its leadership. Meanwhile, its better-rated stock makes it a problem right now.

2. Microsoft

When investing in technology, it’s a good idea to diversify your holdings in software and hardware. While Nvidia is a great option to secure a foothold in the hardware side of the industry, Microsoft has years of experience dominating software. Homegrown products like Windows, Office, Xbox, Azure and LinkedIn have helped the company build a massive user base and a strong role in technology.

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Since 2019, Microsoft has generated less revenue and stock price growth than AMD. However, like Nvidia, Microsoft has been much more consistent, making it a less risky investment. As a result, the company’s stock is potentially a better long-term holding.

Microsoft’s reliability is mainly due to its completely diverse business model. The company holds leadership positions in several technology areas, from productivity software to operating systems, video games, social media, cloud computing and digital advertising.

Moreover, Microsoft is never still for long, constantly reinvesting in its businesses and looking for new growth markets. The company’s commitment to innovation made it an early investor in AI, sinking $1 billion into ChatGPT developer OpenAI in 2019. That figure has since grown to around $13 billion, with the powerful partnership giving Microsoft access to some of the most advanced AI software.

Meanwhile, Microsoft has already started to see increases in AI earnings, thanks to recently launched AI solutions on its cloud platform, Azure, and paid features in Office. In fiscal 2024 (ended June), Microsoft’s revenue rose 16% year over year, while operating income rose 24%. The period saw 20% growth in cloud sales and 12% growth in its productivity and business processes segment, both divisions expanding their AI offerings.

Microsoft’s diversified business gives it countless ways to monetize its AI business. Along with $74 billion in free cash flow and a better-valued stock, it’s worth picking Microsoft over AMD in August.