NVIDIA (NVDA +0.77%) investors have been laughing all the way to the bank this year. Shares of the graphics card specialist have shot up more than 50% so far in 2019, which is a tad surprising given that the company has been mired in mediocrity.
Four consecutive quarters of revenue declines and potential market share losses to rival Advanced Micro Devices (AMD +3.32%) have been masked by NVIDIA stock's rally. But this doesn't mean investors should turn a blind eye toward its shortcomings.
There was a sigh of relief among NVIDIA bulls when it emerged that the company will finally return to top-line growth in the fourth quarter of fiscal 2019. The graphics specialist's revenue forecast of $2.95 billion for the current quarter is a 34% improvement over the prior-year period, though not up to Wall Street's expectations.
Still, NVIDIA bulls will be hoping for the company to build upon this potential growth and deliver more upside next year. But savvy investors should consider booking their profits in NVIDIA stock and look at AMD, as the latter appears to be a better growth stock for 2020. Let me explain why.
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AMD has greater growth potential
While NVIDIA's revenue growth potential is definitely appealing, AMD promises much more. AMD predicts a 49% annual increase in its fourth-quarter revenue to $2.1 billion. Though that level of revenue growth is coming from a smaller base when compared to NVIDIA, investors shouldn't forget that AMD has managed to consistently clock a faster pace than its rival this year.
NVDA Revenue (Quarterly) data by YCharts.
What's more, a compilation of analyst estimates as per Yahoo! Finance tells us that AMD is expected to outgrow NVIDIA in the coming year. NVIDIA's top-line growth forecast for the next fiscal year stands at just under 20%, while AMD's revenue is expected to increase nearly 27%.
It's easy to see why AMD is expected to beat NVIDIA in 2020. After all, NVIDIA is known for selling graphics cards into the gaming, data center, automotive, and other industries, while AMD does more than just that. Because AMD supplies processors that are used in PCs, laptops, and servers, it is a much more diversified bet when compared to its bigger rival.
Another advantage for AMD is that it is a small player in the data center and PC processor markets. Thanks to the technological advantage that AMD enjoys over its processor rival Intel, the former has been able to make solid inroads into the CPU (central processing unit) and server processor markets.
Mercury Research reports that AMD has increased its CPU market share to 18% in the third quarter of 2019 as compared to 13% a year ago. The chipmaker's market share in laptop CPUs also jumped 3.8 percentage points year over year to 14.7%. In servers, AMD is now sitting on a market share of 4.3%, up 2.7 percentage points from the year-ago period.
AMD's resurgence in the CPU and server processor markets makes it a better bet than NVIDIA, as the latter does not make such chips. Similarly, in graphics cards, AMD reportedly gained nearly 10 percentage points of market share sequentially in the second quarter, according to Jon Peddie Research.
And finally, AMD is all set to supply processors for next-generation consoles from both Sony and Microsoft next year. This is another missed opportunity for NVIDIA. All of this indicates that AMD has more opportunities to boost its financial performance next year when compared to NVIDIA. This reflects on the potential revenue growth expected from both companies in 2020.
What about the valuation?
There's no denying the fact that AMD is much more expensive than NVIDIA right now. The former's trailing price-to-earnings (P/E) ratio of 201 is nearly 4 times NVIDIA's multiple of 53 times. However, things change drastically on a forward earnings basis.
AMD's forward P/E ratio of 36 shows that it is estimated to deliver terrific earnings growth, and the multiple is less than half of AMD's five-year average forward P/E of nearly 76. NVIDIA's forward P/E of 29 shows that its earnings are also expected to jump nicely, though not as handsomely as AMD's.
According to a compilation of analyst estimates, NVIDIA's earnings per share are expected to jump by a third next fiscal year. AMD's earnings per share, on the other hand, are anticipated to jump a whopping 75%. With that in mind, it is not surprising to see AMD trading at a far richer valuation than NVIDIA on a trailing P/E basis, and the gap narrows substantially on a forward P/E basis.
Given that AMD enjoys access to more markets when compared to NVIDIA, it should be able to hit the lofty targets Wall Street has set for the company next year. Meanwhile, if NVIDIA continues to lose market share to AMD, the former's growth potential could get diluted.
