One of the lingering effects of the COVID-19 pandemic is the disruption to supply chains. Just about every industry has had to take special action to address road bumps in their supply chain. One sector that has been particularly vulnerable to these problems is computing and semiconductors.

Because of this, two of the sector's titans, Nvidia (NVDA 1.87%) and Advanced Micro Devices (AMD 9.06%), are getting some extra attention right now from several Wall Street research analysts. That added attention has led to atypical volatility lately as investors look to find more stable places to allocate capital. Let's dig into what Wall Street is saying about these two stocks. 

A person builds a semiconductor microchip.

Image source: Getty Images.

Buy, sell, or hold?

Over the last several weeks, analysts from Robert W. Baird, Susquehanna, Needham & Company, and Bank of America have all published updated research notes about Nvidia and AMD. Each firm offered its own opinion regarding how the semiconductor players will either face an uphill battle or sidestep any near-term challenges. Unsurprisingly, the stock prices of both Nvidia and AMD experienced more pronounced volatility. 

Both Robert W. Baird and Susquehanna cited diminishing demand in graphics processing units (GPUs) as a primary reason to downgrade the stock. Susquehanna analyst Christopher Rolland also referred to a macro-specific problem, namely the decline in crypto prices throughout 2022. The reason semiconductor stocks could be negatively impacted by this trend in crypto: Demand for high-end processing chips may wane as investors bear the "crypto winter."     

On the other hand, Bank of America and Needham both identified several long-term catalysts that should excite investors for both Nvidia and AMD.

What the fundamentals tell us

Needham and Bank of America issued research notes to investors acknowledging that while graphics processing and personal computing hardware indeed face supply chain pressures, Nvidia and AMD have done a nice job shifting focus toward cloud and data centers. Needham's guidance follows its prediction from March that Nvidia will be the first trillion-dollar semiconductor company.   

During its investor day in March, Nvidia illustrated robust growth across different pillars of its business. For fiscal year 2022 (ended Jan. 31), Nvidia reported $10.6 billion in revenue from data centers, an increase of 58% year over year. Growth in gaming revenue narrowly eclipsed data centers, as the company generated $12.5 billion in revenue, representing a 61% year-over-year increase. However, looking at a longer-term trend may shed light on why Wall Street is so bullish on data centers. For fiscal year 2021 (ended Jan. 31, 2021), Nvidia reported $6.7 billion in revenue from data centers, which was an increase of 123% year over year. By comparison, gaming revenue grew from $5.5 billion to $7.8 billion, or 42%.

End markets such as data centers are well-positioned for growth as increased digitization, multiple device connection adoption, and Internet of Things (IoT) contribute as key drivers to the boom in data. Despite the downgrades from other banks, Needham reiterated its buy rating on Nvidia with a $375 price target, which implies an almost 79% upside for the stock from current prices.  

Similar to Nvidia, analysts have expressed concern over AMD's PC and graphics segment. However, AMD has demonstrated resiliency to investors throughout the pandemic and has swiftly navigated around a number of challenges. Despite near-term headwinds in computer graphics, investors should realize that AMD doubled its data center revenue year over year for the year ended Dec. 25, 2021. Unfortunately, quantifying exact figures for data center revenue can be challenging because the company groups data centers revenue with other goods and services. Both Nvidia and AMD have established strong footprints in the semiconductor industry thanks in large part to multiple, differentiated revenue streams.   

Monitor valuation levels

At the moment, Nvidia stock is down almost 22% in the last month and 28.6% year to date. The steep decline in stock price is largely attributed to different opinions across Wall Street, combined with investor fears about lingering supply chain disruption. Similarly, AMD is down 21% over the last month and about 36% year to date.

Although both companies face near-term headwinds in personal computing, the potential of data centers should not be underestimated. As data becomes more integral for businesses of all sizes, Nvidia and AMD appear well-positioned to continue dominating the data center landscape in both the short term and long term. As the stock prices for each have fallen over the last several weeks, now may be a good time to buy the dip as both have shown investors they can win over the long term.