If you're looking to invest in the graphics processing unit (GPU) market, you're likely trying to choose between Advanced Micro Devices (AMD -0.35%) or NVIDIA (NVDA -3.33%) stock. Here's the challenge: Both offer compelling benefits and delivered extraordinary performance in their latest earnings reports.
So how should an investor determine which is the better buy? Let's break down the pros and cons of each company to find out.
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NVIDIA: More than gaming
NVIDIA is the dominant player in the GPU space, commanding more than an 80% market share. This alone makes the company an attractive investment with its imposing position over rival AMD. But could it also mean its growth prospects are limited? After all, there's no going up when you're at the top.
That's true if you look at GPUs as applicable only for video games. NVIDIA doesn't. It sees GPUs as useful for other business applications such as data centers and artificial intelligence (AI). That approach led to NVIDIA's amazing fourth-quarter results.
| GAAP Metric | Q4 FY 2020 | Q4 FY 2019 | Change (YOY) |
|---|---|---|---|
| Revenue (in millions) | $3,105 | $2,205 | 41% |
| Gross margin | 64.9% | 54.7% | 1,020 basis points |
| Operating income (in millions) | $990 | $294 | 237% |
| Net income (in millions) | $950 | $567 | 68% |
| Earnings per share | $1.53 | $0.92 | 66% |
Data source: NVIDIA. GAAP = Generally accepted accounting principles. YOY = year over year.
NVIDIA shares rose to a 52-week high of $316.32 on the news, but recently saw a decline in its share price, as have many technology stocks, due to novel coronavirus fears. The dip gives investors an opportunity to jump in, but even with the decline, the stock sports a price-to-earnings (P/E) ratio of nearly 58 as of this writing.
A look at AMD
For starters, AMD shares are currently priced below $50 per share, but its P/E is an eye-popping 160. Like NVIDIA, AMD enjoyed a stellar fourth quarter.
| GAAP Metric | Q4 FY 2019 | Q4 FY 2018 | Change (YOY) |
|---|---|---|---|
| Revenue (in millions) | $2,127 | $1,419 | 50% |
| Gross margin | 45% | 38% | 700 basis points |
| Operating income (in millions) | $348 | $28 | 1,143% |
| Net income (in millions) | $170 | $38 | 347% |
| Earnings per share | $0.15 | $0.04 | 275% |
Data source: AMD.
AMD's growth in 2019 was powered by its entry into the central processing unit (CPU) market long dominated by Intel. The likes of Apple began employing AMD chips in its laptops. And like NVIDIA, AMD found success selling its chips to data centers. For instance, both Amazon.com and Microsoft's cloud computing offerings include the use of AMD chips.
Who has the upper hand?
The Q4 results show both NVIDIA and AMD are doing well on the income side. They begin to diverge when you look at their other financials. Of its $17.3 billion in total assets, NVIDIA holds a hefty $10.9 billion in cash, more than enough to pay its total liabilities of $5.1 billion. Meanwhile, AMD's total assets of $6 billion include $1.5 billion in cash against total liabilities of $3.2 billion.
NVIDIA also pays a dividend, and with a record $4.76 billion in cash flow from operations for the 12 months ended Jan. 26, 2020, compared to dividend payments of $390 million, the company can safely continue to pay its shareholders. AMD, however, does not offer a dividend.
NVIDIA's cash-rich position enabled it to acquire Mellanox Technologies, a company selling data center equipment. Given that the data center segment accounted for over 30% of NVIDIA's Q4 revenue, the acquisition makes sense. AMD, on the other hand, is not in a position for an acquisition of that magnitude without taking on debt.
When looking at the overall picture of both companies, NVIDIA outshines AMD as the better buy. NVIDIA is pushing its leadership position in GPUs into new industries like AI with greater effectiveness than AMD, and its fiscal discipline gives it the flexibility to continue delivering value to shareholders.
