Nvidia Vs. AMD: Which Stock Is A Better Buy?
Both Nvidia and AMD have struggled in 2022 with NVDA having a revenue drop of 29% in the last 6 months. Find out which stock is the better buy.
Nvidia Vs. AMD: Which Stock Is A Better Buy?
Summary
- Nvidia is the largest semiconductor stock in the world based on market value.
- Both Nvidia and AMD have struggled in 2022 with NVDA having a revenue drop of 29% in the last 6 months.
- Both companies' reliance on China may present a long-term problem if geopolitical issues between China and the US become more severe.
- Looking for a helping hand in the market? Members of Turnaround Stock Advisory get exclusive ideas and guidance to navigate any climate. Learn More »
Overview
NVIDIA Corporation (NVDA) and Advanced Micro Devices, Inc. (NASDAQ:AMD) are micro-chip designers that have recently seen their once lofty share price drop precipitously. Over the last year, NVDA has managed a measly 9% return while AMD is in negative territory with a minus 20%.
Nvidia is the largest semiconductor company in the world easily outdistancing such giants as TSMC (TSM), Samsung (OTCPK:SSNLF), and Intel (INTC). Note that AMD's market cap is less than 1/4th of Nvidia's.
Nvidia designs high-end chips, especially for graphics and AI (Artificial Intelligence) purposes. However, they do not manufacture their own chips, they subcontract their production of them to others, mainly Taiwan Semiconductor.
AMD, of course, is famous for being one of only two companies (the other is Intel) to have patent rights to the X86 chip which has been in use since 1978. The X86 is still used extensively in servers, laptops, and desktop PCs. It also manufactures other chips including graphics chips. AMD also outsources its chip production to Taiwan Semiconductor.
To see how bad it has been for tech stocks in general over the last 12 months, the next chart adds Invesco QQQ Trust (QQQ) as a proxy for the tech market in general. It shows that QQQ is down "only" 8%, while AMD is down 20% and Nvidia is up 9%.
Despite the bad year, few believe that these two tech stalwarts are not going to outperform most stocks over the coming years.
In this article, I will compare Nvidia and AMD head-to-head to see which one is the better 2023 investment.
NVDA And AMD Stock Key Metrics
As you can easily see in the table below, Nvidia and AMD are similar in size based on revenue (Line 2). But when it comes to Price/Sales (Line 3) AMD appears to be a much better value with a ratio of 5.6x versus NVDA's 21.5x.
Gross Margins (Lines 5, 8 and 9) are also interesting with NVDA having a better gross margin overall (Line 5) 57% to 51%, but a much lower percentage when compared to Market Value (Line 8).
This could imply that AMD is relatively underpriced compared to Nvidia.
The PE Ratio (Line 11) is another metric where AMD's PE (26.9x) appears to be undervalued compared to Nvidia's rather lofty 52.3x.
Another significant difference is Nvidia's EBITDA (Line 13) which is more than 50% higher than AMD's EBITDA. Free cash flow (Line 15) is an area where NVDA and AMD are relatively close 3.8b to 3.1b but on a Price to FCF basis (Line 16), NVDA is more than 3 times higher than AMD's which once again may indicate that AMD is undervalued compared to NVDA.
Nvidia's dividend rate (Line 18) is insignificant at .1% while AMD's dividend rate is zero.
Based on current financial metrics, AMD looks like a better bargain than Nvidia's rather lofty numbers.
What Is The Difference Between AMD And NVDA?
Nvidia and AMD compete in what both call "Data Center", although I would guess that both have slightly different markets. Nvidia utilizes graphics chips to manipulate large amounts of data with parallel processing for AI purposes while AMD's Data Center Group provides more traditional Server chips in server farms type of installations.
Below is the revenue breakdown of each company from their most recent 10Ks.
Nvidia:
AMD:
Note that "Gaming" is the largest revenue source for both companies. "Data Center" is the 2nd largest revenue source but is growing rapidly and would seem to be on its way to surpassing "Gaming" soon perhaps in 2023. Since 2020, "Data Center" revenue is up more than 350% for AMD and 230% for Nvidia.
Interestingly, Nvidia's Automotive revenue is down from 2020 making one wonder if the future of that segment is going to be as big as some are predicting.
So there would appear to be quite a bit of overlap/competition in revenue sources.
How Does Their Growth Compare?
Looking at the growth in major financial categories, Nvidia and AMD are very similar.
Over the last 3 years, AMD has increased revenue by 225% compared to NVDA's 129%. Also, note NVDA's decline in revenue over the last 6 months.
On an FCF (Free Cash Flow) basis, the growth has been in the 20% range for both companies but once again you can see the steep drop in Nvidia's FCF over the last 6 months while AMD's continues to grow.
However, on the basis of the EBITDA Nvidia leads but once again NVDA has dropped precipitously over the last 6 months.
So on a growth basis, both companies are slowing down but Nvidia seems to be slowing more.
Are These Stocks Fairly Valued?
If we look at analysts' ratings for both stocks we see that both companies are highly rated. Nvidia has 35 Buy recommendations and only 7 Sell recommendations. That is impressive.
But AMD's ratings are a home run with 37 Buy recommendations and only 1 Sell.
Looking at the quant ratings, both companies currently have a Hold rating.
Do the quants know something about Nvidia and AMD that the analysts don't?
Both these stocks are more fairly valued than they were one year ago, but are they reasonable enough for investment in 2023 considering the risks for the world economy, chip sourcing, and customer indecision?
In my opinion, both these stocks are underrated based on historical performance and the inevitable turnaround will show up in the next year or two.
Having said that, I would rate AMD as a better value at this point based on better financial metrics like Price to FCF and PE Ratio.
What Should Investors Consider About These Stocks?
One of the potential long-term issues for both Nvidia and AMD is the reliance on China, Hong Kong, and Taiwan for both sales and production. With increasing animosity between governments worldwide but especially between the US and China, this is a legitimate long-term issue.
Note below that more than 50% of Nvidia's revenue comes from China and Taiwan. More than 20% of AMD's revenue comes from China so they are in a somewhat lesser-risk position than NVDA.
Nvidia:
AMD:
Is Nvidia Or AMD Stock A Better Buy?
The obvious investment question is whether now is the time to buy either NVDA or AMD. Both have shown significant share price losses over the last year.
If you look backward you will see both shares down considerably since November 2021 AMD by 44% and NVDA down 22%.
Although doing better than AMD (if down less can be considered better) Nvidia is not without its own set of issues. Revenues have fallen from $8.3 billion in the May 2022 quarter to $5.9 billion in the current quarter, a stunning drop of 29% in just six months.
For the long term, both are excellent choices, but for 2023 I see AMD as a classic turnaround stock with its battered share price able to begin recovery by the end of 2023.
At their current prices, AMD stock is a Buy and NVDA stock is a Hold.
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Comments (15)
I guess there is one advantage NVDA has and that is it pays a dividend.
They had tons of revenue & profit, but they never revised the reward in more dividend (even if i know it is still important to use the majority of the cash in R&D and then production lines)