Better buy: Nvidia vs. Advanced Micro Devices

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Nvidia (NASDAQ: NVDA) and modern micro devices (NASDAQ: AMD) have been outstanding performers on the stock market so far this year, with the stocks of both technology giants beating the broader market with comfortable margins. Nvidia turned out to be the better of the two stocks, as the following chart shows.

AMD stock, on the other hand, has outperformed the broader market for most of the year before it recently stepped on the gas. AMD’s weaker returns aren’t necessarily a bad thing for investors looking to add a top growth stock to their portfolio right now, however. Let’s see why that can be the case.

NVDA data from YCharts

AMD is growing faster than Nvidia

AMD recently released its third quarter results for the three months ending September 25th. The company again posted excellent growth, with revenue jumping 54% year over year to $ 4.3 billion for the quarter. Adjusted gross margin rose 440 basis points year-over-year to 48%, while non-GAAP net income rose 78% to $ 893 million. The chipmaker’s earnings were $ 0.73 per share for the third quarter, a significant increase from $ 0.41 per share for the same period last year.

More importantly, AMD has increased its full year revenue forecast due to solid demand for its chips, which are used in computers, game consoles, and data centers. The company now expects sales to grow 65% in 2021, up from its previous forecast, which included a 60% increase.

Man and woman looking at a laptop screen.

Image source: Getty Images.

Nvidia, on the other hand, has yet to publish the results of the third quarter of fiscal year 2022 for the three months ending in October. However, the forecast suggests that revenue growth won’t be as good as AMD’s. When Nvidia released its financial results for the second quarter on August 18, 2021, it claimed sales of $ 6.8 billion in the third quarter. The graphics specialist had sales of $ 4.7 billion for the same period last year, which means it is well on its way to a 45% jump in sales.

Of course, Nvidia could deliver better-than-expected performance and a bigger jump in sales, but full-year growth is likely to pale compared to AMD. Analysts expect Nvidia to close fiscal 2022 with revenue growth of 54%, which would be lower than AMD’s forecast growth of 65%. Nvidia may not be able to fill that void even if it beats analysts’ estimates, as AMD itself has a habit of constantly beating Wall Street’s estimates and raising its forecasts.

In fact, AMD has raised its full-year revenue forecast every time it released results that fiscal year. The company originally targeted sales growth of 37% when it released its fourth quarter 2020 results in January this year, but raised its forecast to 50% growth when it released its Q1 report. And then to 60% when it released its Q2 results in July. So it can be assumed that in terms of growth, AMD is well on its way to outperform Nvidia. However, that’s just one of the reasons AMD might turn out to be a better buy than Nvidia.

AMD has different catalysts

Nvidia generates most of its revenue from selling its graphics cards for two applications – video games and data centers. Gaming was the largest source of revenue for the second fiscal quarter, accounting for 47% of revenue. The data center segment followed in second place with 36% of total sales. Nvidia is the dominant player in these markets. According to Jon Peddie Research, its share of the discrete graphics card market was 83% in the second quarter of 2021. AMD controlled the rest of the market, which means Nvidia is a leader in this segment.

Nvidia’s dominance in these markets has propelled the company’s sales and earnings and propelled its stock higher. However, AMD is offering investors the opportunity to seize more opportunities. For example, the company’s computer and graphics division offers central processing units (CPUs) for PCs, notebooks and workstations, as well as the sale of graphics cards used in data centers and video games. Nvidia doesn’t sell CPUs, so AMD offers investors an additional market to take advantage of.

Additionally, it’s worth noting that AMD appears to be making strides in the GPU market. AMD noted in its latest earnings conference call that sales of data center GPUs more than doubled compared to the same period last year. Management also said sales of its consumer graphics cards have increased “significantly” thanks to the introduction of new graphics cards at aggressive prices.

Alternatively, AMD supplies data center CPUs and game console chips through the enterprise, embedded and semi-custom (EESC) business. Nvidia is currently not in the data center CPU market, the Grace CPU is not expected until 2023. This paves the way for AMD to take more market share from AMD Intel at this point and boosts the data center business and gives investors another reason to choose AMD stock over Nvidia.

Finally, AMD’s semi-custom chips are used in the PlayStation 5 and the latest Xbox consoles, and the upcoming Steam Deck would add another game console to its portfolio. Nvidia meanwhile only has the Switch console from Nintendo to open up the game console room. Sales of the PlayStation 5 and Xbox Series X / S consoles are expected to pick up in the coming years, according to third-party estimates, as the consoles are still in the early stages of their life cycle.

All of this suggests that AMD has more far-reaching catalysts than Nvidia, and investors don’t have to pay through the nose to use them.

The rating tipped the scales in favor of AMD

AMD trades at 40x trailing profit, which makes it much cheaper than Nvidia, which trades at 95x trailing profit. In addition, AMD’s price-to-sales ratio of 10.7 is much lower than Nvidia’s multiple of 30.7.

The decision in favor of AMD shares over Nvidia currently looks like a breeze. AMD is expected to outperform Nvidia, it has a wider range of catalysts, and is significantly cheaper – making it an ideal bet for investors looking to buy either of those two growth stocks right now.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends Intel and Nintendo and recommends the following options: long January 2023 $ 57.50 calls on Intel and short January 2023 $ 57.50 puts on Intel. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.

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