Last November, I compared Advanced Micro Devices (AMD -5.44%) and Nvidia (NVDA -10.01%) and declared that the latter's stronger gaming and data center GPU sales made it a more promising investment than the former. However, Nvidia's stock has declined almost 60% since I wrote that article. AMD stock fared slightly better but was still nearly cut in half.
Both semiconductor stocks were crushed by the post-pandemic slowdown in PC sales and rising interest rates, which drove investors away from higher-growth tech stocks. Plunging cryptocurrency prices exacerbated the pain as frustrated miners gave up and flooded the market with second-hand GPUs.
Image source: Getty Images.
I clearly underestimated those headwinds last year, but could either of these battered stocks bounce back over the next few quarters? Let's take a fresh look at both chipmakers and see if either stock is worth buying today.
What happened to AMD?
AMD generates most of its revenue from x86 CPUs and discrete GPUs, but it remains the underdog in both markets. It controls 35% of the x86 CPU market, according to PassMark, while Intel (INTC -2.40%) holds the remaining 65%. AMD holds a 20% share in the discrete GPU market, according to JPR, while Nvidia still dominates 79% of the market.
Throughout most of AMD's history, it relied on selling cheaper CPUs and GPUs to keep pace with Intel and Nvidia. But under CEO Lisa Su, who took the helm in 2014, AMD started to pull ahead of Intel with smaller, denser, and more power-efficient CPUs. It accomplished this by outsourcing its manufacturing to Taiwan Semiconductor Manufacturing (TSM -3.45%), the world's most advanced contract chipmaker, instead of producing them with capital-intensive internal foundries like Intel.
AMD has roughly doubled its market share in CPUs against Intel over the past six years, but it hasn't made meaningful progress in the GPU market against Nvidia, which has repeatedly launched cheaper GeForce cards to keep pace with AMD's Radeon cards in the lower-end gaming market. AMD also carved out a niche by selling custom APUs, which merge together a CPU and GPU, for Microsoft's Xboxes and Sony's PlayStations.
In 2021, AMD's revenue soared 68% to $16.4 billion, its adjusted gross margin expanded 370 basis points to 48.3%, and its adjusted earnings more than doubled. Analysts expect its revenue and adjusted earnings to grow another 60% and 57%, respectively, this year. But in 2023, they expect AMD's revenue and adjusted earnings to only rise 13% and 12%, respectively, as the PC market cools off. A resurgent Intel, which has been aggressively upgrading its plants to produce more advanced CPUs, could also stir up more competitive headwinds over the next few years.
What happened to Nvidia?
Nvidia generates most of its revenue from gaming and data center GPUs. Both markets fired on all cylinders throughout the pandemic. Its sales of gaming GPUs surged as people stayed at home, played more PC games, and mined more cryptocurrencies. The elevated usage of cloud-based services also boosted sales of its data center GPUs, which are mainly used to process advanced machine learning and AI tasks.
Like AMD, Nvidia outsources the production of its GPUs to leading foundries like TSMC and Samsung. Under its founder and longtime CEO Jensen Huang, Nvidia repeatedly held AMD at bay with its more power-efficient chips. AMD's top-tier cards come close to matching Nvidia's in terms of graphical performance, but they generally consume a lot more power.
Nvidia's revenue soared 61% to $26.9 billion in fiscal 2022, which ended this January, as its adjusted gross margin expanded from 65.6% to 66.8%. It usually operates at higher margins than AMD because it sells pricier GPUs and isn't encumbered by AMD's lower-margin CPU and APU sales. Its adjusted earnings jumped 78% for the full year.
But just like AMD, Nvidia faces a near-term slowdown as the PC market cools off. Analysts expect its revenue to rise just 3% this year as its adjusted earnings tumble 24%. Nvidia faces a much rougher landing than AMD because it's much more dependent on the cyclical gaming market, which generated 38% of its revenue in the first half of fiscal 2023. Some of those gaming GPUs are also tethered to the sluggish crypto mining market.
To make matters worse, U.S. regulators recently ordered Nvidia to stop selling its most advanced data center GPUs to China. That ban could reduce Nvidia's revenue by up to $400 million in the current quarter. AMD, which doesn't generate much revenue from high-end data center GPUs, doesn't expect that ban to have a material impact on its business.
The valuations and verdict
AMD's forward price-to-earnings ratio has cooled off to 16, but Nvidia still trades at 40 times forward earnings. AMD also trades at just five times this year's sales, while Nvidia still trades at 12 times this year's sales.
AMD's lower valuations, broader diversification, and softer post-pandemic landing all make it a more compelling buy than Nvidia right now. Nvidia is a solid stock, but it won't be a bargain until its valuations cool off to more sustainable levels.
