Computers in many forms are becoming increasingly vital for both business and personal use. Two leading computer component suppliers are Nvidia (NVDA 3.71%) and Advanced Micro Devices (AMD) (AMD 1.33%).
These competitors have both been successful investments over the last three years, with Nvidia and AMD returning 624% and 594% respectively, handily beating the NASDAQ-100's 140% return. Unfortunately, investors can't go back in time and purchase these two winners -- so which is the better stock going forward?
Image source: Getty Images.
Company overviews
While Nvidia started off creating graphics processing units (GPUs), it has expanded to include much more. At first, its GPUs rendered 3D graphics and accelerated video. Now they power engineering simulations and data centers along with their continual use in the video game sector. Additionally, Nvidia has crossed over into the software market and has augmented reality (AR) and virtual reality (VR) solutions.Nvidia's products are widespread across many industries, such as self-driving cars and medical research, insulating its business from a potential industry-specific downturn.
AMD competes with Nvidia in the GPU segment but also has a wider hardware product range. Its Epyc processor powers data servers and is utilized by practically every cloud provider. As a holder of more than 250 world records, it's not hard to understand why it is considered the most powerful data center processor available. Consumer computers also utilize AMD's processors, making AMD less diversified across business segments than Nvidia.
Winner: Nvidia
New products
During the Consumer Electronics Show (CES) held earlier this month, each company announced a new lineup of products. Nvidia announced several new graphics cards and an autonomous driving solution that utilizes an Nvidia computer and sensors. Not to be outdone, AMD also announced new graphics cards as well as new CPUs.
I don't pretend to be an expert in how important these new products will be. However, each stock and a competitor, Intel (INTC 1.77%), reacted differently the day after each company made its announcements at CES. Examining what the market thinks is an easy way to understand the potential monetary impact new products will have on the companies.
| Stock Price Return Jan. 5 | |||
|---|---|---|---|
| Nvidia | AMD | Intel | NASDAQ-100 |
| (5.76%) | (5.73%) | 1.37% | (3.12%) |
With similar, worse-than-market days, neither Nvidia nor AMD made a big enough splash to trigger a positive response like Intel did.
Winner: Tie
Leadership
Both companies' CEOs are legendary. AMD's CEO Dr. Lisa Su is responsible for resurrecting a struggling company. Prior to her taking the role on Oct. 8, 2014, the stock still remained well below its highs set before the financial crisis and dot-com bubble and had done nothing for five years. It was often said Intel allowed AMD to exist so it wouldn't be accused of monopolistic behavior. Due to Su's leadership, AMD has flipped the script and has Intel on the ropes.
Jensen Huang co-founded Nvidia in 1993 and has led it over nearly 30 years. With his leadership, the GPU use case expanded and he steered his company to include more than just hardware. Huang is a true visionary and his company is still developing innovative concepts like the omniverse -- a platform for metaverse creators.
Both are great leaders, but Huang has the edge for me because of his proven innovation. He also ranked No. 31 on Glassdoor's top CEO list for 2021, a list where Su did not break into the top 100.
Winner: Nvidia
Valuation
The market enthusiasm for Nvidia is reflected in its high valuation.
AMD PE Ratio data by YCharts
As both Nvidia and AMD are fully optimized for profits, these price-to-earnings (PE) ratios can be taken at face value. With a more than 80 PE ratio, Nvidia is an expensive stock, and investors must pay up for it. AMD is more reasonably valued and defeats Nvidia from this standpoint.
Winner: AMD
Financials
While each operates a similar business, one company has noticeably better financials. During the third quarter, each reported similar revenue growth, with Nvidia and AMD growing 50% and 54% respectively.
When comparing margins, Nvidia's position is enviable next to AMD's.
| Metric | Nvidia | AMD |
|---|---|---|
| Gross margin | 65% | 48% |
| Operating margin | 38% | 22% |
| Profit margin | 35% | 21% |
Data source: Nvidia and AMD
Nvidia's cost of revenue is less than AMD's, allowing it to be more profitable. This advantage lets Nvidia invest more in new technologies and other endeavors and still maintain a healthy margin.
Winner: Nvidia
The verdict
At a final tally of three wins, one loss, and a tie, Nvidia takes the cake for the better buy. The biggest takeaway for me is that Nvidia has moved into other industries, where AMD has stayed relatively in the same field. This trickles down to Nvidia's superior financials and affects how the market values each stock. I don't think AMD is a bad investment, but Nvidia's superior vision and product pipeline give it the edge.
