In the world of artificial intelligence (AI) hardware, Nvidia (NVDA +2.71%) reigns supreme. However, another competitor also has a solid AI product lineup: AMD (AMD +5.24%). While AMD's technology isn't at the same level as Nvidia's in the AI space, it's still quite good and is often considered by many clients before spending significantly on a data center.
As the AI revolution becomes a more popular business topic, AMD has focused more on the technology. But has it done enough to unseat Nvidia? Or is AMD just the annoying little brother? Let's find out.
AMD saw revenue decline nearly across the board in Q2
The one piece of business news that kicked off the entire AI investment storm was Nvidia's second-quarter 2024 guidance for 64% revenue growth. It saw a massive demand for AI-related products, and management felt confident enough in the trend to offer bombshell guidance.
Since AMD offers many of the same products as Nvidia, it would make sense that it should see a similar boost in revenue. But that's not what happened in AMD's Q2.
Image source: The Motley Fool.
As you can see from the chart above, AMD's business didn't see any effects that Nvidia was describing. The only business segment that saw any growth was its embedded sector, which is tailored toward more industrial uses.
The biggest disappointment is clearly its data center division, which saw revenue fall 11%. This is where investors would see the effect of a massive AI demand, but it's absent.
Now the real question is, what will Nvidia's results look like? The company reports earnings on August 23 and will be a must-listen for investors. It's possible that Nvidia could fall flat on its face and experience a similar drop to AMD's data center. However, I think that's unlikely because Nvidia's management likely saw many orders that led them to give its guidance.
NASDAQ: AMD
Key Data Points
So to answer the question, "Can AMD dethrone Nvidia?" I'd say Q2 is evidence that it cannot. But is AMD still worth considering as an investment?
The stock looks incredibly expensive from a historical perspective
While AMD's revenue was disappointing, it didn't do anything with its expenses that was noteworthy, either. AMD posted an operating loss of $20 million, but thanks to onetime benefits, it managed to post a profitable quarter. With lopsided earnings, it makes it challenging to value AMD on a price-to-earnings basis.
Instead, I'll use the price-to-sales (P/S) ratio, which makes it a bit easier as sales haven't fluctuated nearly as much as earnings.
AMD P/S Ratio data by YCharts.
As you can see, AMD has been around for a long time. However, its P/S ratio has never been this high except for the past few years. It looks cheap compared to Nvidia's absurd 43 times sales valuation. But, investors need to ask themselves if 8.6 times sales is too expensive a price for a cyclical hardware company.
To me, I'd say yes. AMD's all-time best 12-month profit margin was 27%. Its P/S ratio of 8.6 times sales with a 27% profit margin translates into a stock with 32 times earnings. So at today's valuation, with its all-time-best profit margin, it would still be as expensive as some tech giants with much more stable businesses (that have better margins).
At these levels, AMD isn't worth investing in. Combine that with the company failing to see any traction on a trend that can potentially boost the business significantly, and I think investors should avoid investing in AMD stock. The company could turn it around in subsequent quarters, but there are just too many good stocks out there to bother investing in AMD without the certainty of product success.
