Nvidia (NVDA +0.64%) and Advanced Micro Devices (AMD +0.84%) have been outstanding performers on the stock market so far this year, with shares of both tech giants beating the broader market by comfortable margins. Nvidia has turned out to be the better of the two stocks, as the chart below shows.
AMD stock, on the other hand, has underperformed the broader market for most of the year before stepping on the gas of late. However, AMD's weaker returns aren't necessarily a bad thing for investors who are looking to add a top growth stock to their portfolios right now. Let's see why that may be the case.
AMD is growing at a faster pace than Nvidia
AMD recently released its third-quarter results for the three months ending on Sept. 25. It reported stellar growth once again, with revenue jumping 54% year-over-year to $4.3 billion during the quarter. Adjusted gross margin was up 440 basis points year-over-year to 48%, while non-GAAP net income shot up 78% to $893 million. The chipmaker's third-quarter earnings came in at $0.73 per share, up substantially from $0.41 per share in the prior-year period.
More importantly, AMD increased its full-year revenue forecast due to solid demand for its chips, which are used in computers, gaming consoles, and data centers. The company now expects 65% revenue growth in 2021, up from its prior guidance that called for a 60% increase.
Image source: Getty Images.
Nvidia, on the other hand, has yet to release its fiscal 2022 third-quarter results for the three months ending in October. But its guidance suggests that its top-line growth won't be as good as AMD's. When Nvidia released its fiscal second-quarter results on Aug. 18, 2021, it called for $6.8 billion in Q3 revenue. The graphics specialist delivered $4.7 billion in revenue in the prior-year period, which means that it is on track to deliver a 45% top-line jump.
Of course, Nvidia could turn in a better-than-expected performance and deliver a stronger revenue jump, but its full-year growth is expected to pale in comparison to AMD's. Analysts expect Nvidia to finish fiscal 2022 with a 54% increase in revenue, which would be lower than AMD's projected growth of 65%. Nvidia may not be able to bridge that gap even if it outperforms analysts' estimates, as AMD itself has a habit of consistently beating Wall Street's estimates and raising its guidance.
In fact, AMD has raised its full-year revenue guidance each time it has reported results this fiscal year. The company had originally guided for 37% revenue growth when it released its fourth-quarter 2020 results in January this year but raised the guidance to 50% growth when it released its Q1 report. And then to 60% when it released its Q2 earnings in July. So it can be assumed that AMD is on track to outperform Nvidia as far as growth is concerned. This, however, is just one of the reasons why AMD could turn out to be a better buy than Nvidia.
AMD has diverse catalysts
Nvidia gets most of its revenue by selling its graphics cards for two applications -- video gaming and data centers. Gaming was its biggest source of revenue in the fiscal second quarter, accounting for 47% of its top line. The data center segment came in second with 36% of total revenue. Nvidia is the dominant player in these markets. Its share of the discrete graphics card market stood at 83% in the second quarter of 2021, according to Jon Peddie Research. AMD controlled the rest of the market, which means Nvidia leads in this segment.
Nvidia's dominance in these markets has supercharged the company's top and bottom lines and sent its stock soaring. AMD, however, gives investors the chance to take advantage of more opportunities. For instance, the company's computing and graphics segment provides CPUs (central processing units) for personal computers, notebooks, and workstations, aside from selling graphics cards that are used in data centers and video gaming. Nvidia doesn't sell CPUs, so AMD gives investors an additional market to take advantage of.
Additionally, it is worth noting that AMD seems to be making headway in the GPU market. AMD pointed out in its latest earnings conference call that revenue from data center GPUs more than doubled over the year-ago period. Management also said that sales of its consumer graphics cards increased "significantly" thanks to the launch of new graphics cards at aggressive prices.
Alternatively, AMD supplies data center CPUs and gaming console chips through the enterprise, embedded, and semi-custom (EESC) business. Nvidia currently doesn't have a presence in the data center CPU market, with its Grace CPU only expected in 2023. This paves the way for AMD to take more market share away from Intel by that time and boost its data center business, and also gives investors yet another reason to choose AMD stock over Nvidia.
Finally, AMD's semi-custom chips are used in the PlayStation 5 and the latest Xbox consoles, and the upcoming Steam Deck would add another gaming console to its portfolio. Nvidia, meanwhile, has only the Switch console from Nintendo to tap into the gaming console space. Sales of the PlayStation 5 and the Xbox Series X/S consoles are expected to take off in the coming years as per third-party estimates, as the consoles are still in the early stages of their lifecycle.
All of this indicates that AMD has broader-ranging catalysts than Nvidia, and investors need not pay through their noses to take advantage of them.
The valuation tilts the scales in favor of AMD
AMD is trading at 40 times trailing earnings, which makes it much cheaper than Nvidia, which trades at 95 times trailing earnings. Also, AMD's price-to-sales ratio of 10.7 is much lower than Nvidia's multiple of 30.7.
Choosing AMD stock over Nvidia right now looks like a no-brainer. AMD is expected to outpace Nvidia's growth, it has a broader range of catalysts, and is substantially cheaper -- making it an ideal bet for investors looking to buy one of these two growth stocks right now.
