- AMD and NVDA stocks have been on a tear in 2016.
- Increasing GPU demand has driven all GPU stocks higher.
- However, which of these chipmakers is a better stock to buy today?
AMD as well as NVIDIA have been on a tear through 2016. Advanced Micro Devices, Inc. (NASDAQ:AMD) stock is up nearly 210% YTD. NVIDIA Corporation (NASDAQ:NVDA) stock isn't far behind, having gained over 185% YTD. Having netted these strong 3-figure gains, investors are obviously happy with how the semiconductors story has unfolded in 2016. However, with the year now drawing to a close, which of these two would be a better semiconductor play, going forward? This would be an obvious question that many investors might have in their mind.
AMD vs NVDA Performance In 2016
AMD has been the clear winner if judged solely on the basis of investor returns. However, a look at the underlying financials unveils a different picture. Nvidia has grown its top line by a good 31% YoY while GAAP EPS has increased by an eye-popping 115% YoY through the first 3 quarters of its Fiscal 2017 (Ending in Jan 2017). In comparison, AMD has seen it topline expand by 4.4% through the first 3 quarters of FY 2016 while improving its bottom line to a loss of 56 cents/share compared to 71 cents per share in the year-ago period. (AMD Stock Looks Set For An Even Better 2017: Advanced Micro Devices, Inc.)
What's even more interesting is the source of growth for the two chipmakers. AMD's growth has been fuelled by the 'Enterprise, Embedded And Semi-Custom' segment, which includes SOC sales for gaming consoles. Given the huge spurt in console sales in 2016, is this the driving force behind AMD's new found growth? Well, I am speculating here as the company does not break out sales between consoles/enterprise. If higher gaming consoles sales are driving this growth, AMD could be in a tricky position really soon as it is no secret that the gaming console market is really finicky and has been in a long-term decline. Yes, there has been a lot of talk about the AMD's recent Polaris launch and the upcoming VEGA GPU launch, but it is to be seen if these become material contributors to AMD's financials. More importantly, can they help AMD turn profitable?
Nvidia's growth, meanwhile, has been driven largely by the Datacenter and Auto segments. Given the fact that these are the next major markets which will drive future demand for high-performance computing and graphics, Nvidia looks to be in a strong position in two rapidly growing markets.
Well, AMD certainly needs to do a lot more to justify the huge run the stock has had in 2016.
Nvidia Has Superior Profit Margins
Moving on from growth to profitability, Nvidia has a far superior profit margin in comparison to AMD. Nvidia's net profit margin has averaged around 13% over the last 5 years while AMD has been mostly in the red with an average profit margin of -12%. AMD has been unprofitable at the operating level, reporting an operating loss in each of the last 8 quarters. Nvidia, on the other hand, has seen its operating margin climb steadily over the last four quarters, climbing from 17% in Q4 FY16 to 32% in the latest quarter (Q3 FY2017). The contrast in the profit margins has got a lot to do with the price segments the companies cater to. AMD competes at lower price points in the GPU market, which is one of the major factors behind the lower margins. (See also: AMD's Zen Architecture To Drive Substantial Growth In 2017: Advanced Micro Devices, Inc)
AMD vs NVDA Valuations
NVDA stock currently trades at a PE ratio of 49X and a sales multiple (PS ratio) of 8.2X. AMD stock, on the other hand, trades at 1.7X sales. It is easy to mistake AMD stock as an attractive buy based on the 'attractive' valuation. However, the lack of a consistent bottomline performance is a big risk. Also, factoring in the lower margin profile of AMD's business, it will be hard to see the company trade at valuations near those of Nvidia stock. With Analysts anticipating NVDA earnings to grow at nearly 25% CAGR over the next 5 years, NVDA could outgrow its seemingly expensive valuations.
The huge run-up in NVDA stock and AMD stock could result in investors flocking to these stocks. While AMD has outperformed its rival in terms of stock returns, the AMD stock is currently pricing in a lot of future growth, which also makes it a higher risk bet. Nvidia stock, on the other hand, is supported by higher profit margins, faster-growing topline/earnings and a consistent bottom line, which make NVDA stock a better long term play in the semiconductor space.
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