When it comes to high-performance chips, Nvidia (NVDA -2.85%) and Advanced Micro Devices (AMD -0.84%) are at the forefront of the semiconductor industry. The companies' products aren't just used for video game hardware, they've also expanded to be crucial components for data centers, artificial intelligence, machine vision, and other applications.
While the long-term demand outlook for both companies' products is promising, both stocks have gotten crushed this year amid volatility for the broader market and some industry-specific headwinds that are dampening semiconductor enthusiasm. Nvidia stock is down roughly 59% across this year's trading, while AMD is down approximately 55%.
Which of these top semiconductor stocks is the better buy at today's prices? Read on to see why two Motley Fool contributors have different takes on which company will deliver superior returns.
Nvidia has demonstrated a strong ability to innovate
Parkev Tatevosian: Nvidia is one of the most innovative technology companies in the world. It's home to cutting-edge graphic processing units (GPUs) that are used in everything from gaming computers to driverless cars. As you might imagine, competition at this advanced level of technology is limited and thus Nvidia can charge premium prices for its products. Indeed, over the past decade, Nvidia's gross profit margin has increased from 52% to 65%. Its revenue rose from $4.3 billion to $26.9 billion in that same time frame, an increase of more than sixfold.
Admittedly, revenue and profit growth might slow in the near term as the company faces headwinds related to the rapidly evolving macroeconomic environment. That said, longer term, Nvidia is one of the leading players in several fast-growing segments in the worldwide economy, including gaming, driverless cars, artificial intelligence, and augmented and virtual reality.
Those segments could provide growing demand for Nvidia's technology. As an investor, I would not want to bet against the success of Nvidia over the next 10 years. To make a case for investing in Nvidia more compelling, the stock is trading at a price-to-sales ratio of 10.4, near the lowest it has sold for in the past five years.
AMD could be better suited for today's turbulent market
Keith Noonan: Both AMD and Nvidia are great companies, but I think AMD stock currently has the more attractive risk-reward profile. Nvidia's revenue grew just 3% year over year in the second quarter despite 61% sales growth for the company's data center segment, and the company's net income fell 72%. Meanwhile, AMD's revenue actually increased 70% year over year in Q2, and the 37% drop for net income that it saw in the quarter still came in significantly lower than Nvidia's profit decline.
While the cyclical nature of product development and releases means that investors shouldn't read too much into short-term disparities, AMD's stronger sales growth lately looks significant considering Nvidia's significantly more growth-dependent valuation.
It is true that AMD is second fiddle to Nvidia in the high-end GPU market, and Nvidia's stronger position in the category means that it deserves some level of valuation premium. In addition to gaming applications, high-performance GPUs have become one of the most important hardware components driving technology trends including cloud computing, artificial intelligence, and machine vision forward. AMD has a strong second-place position in high-end graphics processing units, but Nvidia is more focused on the category and is on track to retain leadership in the space.
On the other hand, AMD's business is more diversified, and its increasingly strong position in the central processing unit (CPU) market and more conservative valuation could make it the better buy in today's volatile market. AMD essentially exists in a duopoly along with Intel in the CPU market for PCs and servers, and it's gaining market share in the category for uses including computers and data centers.
With its less growth-dependent valuation and opportunities to benefit from the evolution of both the GPU and CPU markets, I think AMD stock looks like the better buy right now.
Which leading semiconductor stock is the better buy?
If you're bullish on demand for high-performance processors, it could make sense to invest in both Nvidia and AMD. Both companies have strong businesses and impressive, visionary management teams, and they're seemingly on track to benefit from long-term demand tailwinds connected to major tech trends.
If you're looking to own only one of these stocks, choosing between Nvidia and AMD could come down to your personal appetite for risk and each company's respective valuation levels and growth outlooks. Nvidia's leadership in the GPU market could help it post superior profits over the long term, and this may make it the better pick for more risk-tolerant investors.
Alternatively, AMD has strong positions in both GPUs and CPUs, and its more conservative valuation could make the stock a better fit for those seeking to avoid highly growth-dependent companies while still having exposure to the semiconductor industry.