While the gaming industry is best known for console manufacturers Sony, Microsoft, and Nintendo, PC gaming has grown rapidly since the start of the pandemic. PC gaming is all about having the most powerful components, which can provide a more detailed and smoother experience than consoles.
A critical component of PC gaming is a graphic processing unit (GPU), such as the ones from Nvidia (NVDA +2.07%) and Advanced Micro Devices (AMD +6.16%). The rise of PC gaming has given both companies' stocks triple-digit growth over the last five years.
Declining demand for graphics processing units (GPUs) throughout 2022 coincided with rising inflation and brought down Nvidia and AMD shares between 37% and 48% year over year. However, these companies are unlikely to be down forever, making now an excellent time to invest in one of these tech stars.
Which is the better buy? Let's find out.
Nvidia could see boost on Nintendo console success
The last year has been challenging for Nvidia's stock. The price has dropped nearly 35% in the last 12 months, and at $169, it's close to half the 2021 peak of $329. Despite the price drop, Nvidia's price-to-earnings (P/E) ratio is still high at 72.
If it's going to reclaim its losses, the semiconductor designer must keep growing its revenue in a difficult economic environment. That's where its new line-up of GPUs for PC gaming comes in.
Beginning their staggered release in November, Nvidia's RTX 4000 series of GPUs is the company's biggest hardware launch since 2020. The new models replace the RTX 3000 series of cards, which were wildly successful throughout the pandemic and crypto-mining boom.
However, things have gotten off to a rocky start, with Nvidia "unlaunching" one of its models following consumer backlash and sales not living up to expectations. It isn't all Nvidia's fault, though -- the GPU market hit a 20-year sales low in the third quarter of 2022.
With the market slump, Nvidia has launched its RTX 4000 series at potentially the worst moment in the last 20 years. The end of crypto mining for Ethereum killed that entire segment for Nvidia, and due to the rising cost of living, gamers aren't showing much appetite to upgrade to the new models.
NASDAQ: NVDA
Key Data Points
As a result, there's already talk of Nvidia dropping prices. In 2022, the company misjudged how much consumers were willing to spend by releasing cards at much higher prices than the last generation. The RTX 3080, Nvidia's high-end mainstream GPU, has been replaced by the RTX 4080, with the former launching in 2020 for $699 and the latest version starting at $1,199.
Nvidia has options for adjusting pricing, but if the market drop from Q3 2022 indicates a trend, it will be fighting against the current.
Fortunately, GPUs aren't Nvidia's only source of income from gaming. It also provides the system on a chip (SoC) for the Nintendo Switch. The Switch will be 6 years old in March and is still selling much better than its age would suggest. At 114 million units sold, including over 20 million last year, it's on track to potentially be the best-selling video game console ever.
Nintendo is hard at work on its successor to the Switch, rumored to be again powered by an SoC from Nvidia. The sequel console is expected to be announced in either 2023 or 2024. If the GPU market doesn't pick up, Nvidia will need the Switch successor to be a hit.
AMD enjoys more diverse exposure to gaming
AMD's stock has followed a similar trend as Nvidia's, with its shares down 46% in the last year. The stock is also considerably down from its 2021 peak of $155, now sitting at $71.
Fortunately for AMD, its P/E ratio of 42 is slightly more attractive than Nvidia's. The company also doesn't have as much invested in the success of the GPU market as Nvidia, despite competing with equivalent models.
In Q3 2022, AMD had a 16% market share in the discrete GPU market. Meanwhile, Nvidia had a 72% market share in the same quarter. As a result, a sustained slump in the market would harm Nvidia considerably more than AMD.
Moreover, AMD has its own position in the console market, providing SoCs to Sony's PlayStation 5 and Microsoft's Xbox Series X|S consoles. Combined, the new consoles from Sony and Microsoft are outselling the Nintendo Switch, providing AMD a bigger revenue boost from consoles than Nvidia.
NASDAQ: AMD
Key Data Points
AMD also provides processors (CPUs) for the consumer and gaming enthusiast market. Its new Ryzen 7000 series of CPUs are the company's biggest new product in that space since 2017 and the start of a new platform that will be supported until at least 2025.
Overall, AMD is more diversified in the gaming industry than its competitor Nvidia. The company can rely on two huge customers to sell consoles, it has less exposure in the stagnating GPU market, and its new CPU platform gives it another revenue stream from PC gamers. If you're picking one of these gaming stocks to invest in, AMD stock is the way to go.
