AMD Stock: A Rising Challenger to Nvidia’s Dominance
For the first time since 2019, Advanced Micro Devices (AMD) stock outperformed Nvidia (NVDA) last year. While Nvidia has long been the dominant force in the chipmaking industry, AMD is rapidly gaining ground. Over the past five years, Nvidia’s stock has soared over 1,300%, while AMD’s has seen a respectable 160% increase. However, 2023 marked a turning point, with AMD shares rising 77% compared to Nvidia’s 39% gain. But is this a temporary shift, or can AMD stock continue to outperform Nvidia in 2024 and beyond?
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The AI Chip Race: Can AMD Compete?
A key question surrounding AMD’s stock is whether its chips can effectively compete with Nvidia’s high-priced offerings, particularly in the burgeoning field of Artificial Intelligence (AI). Fortunately, there’s growing optimism. Major tech companies, including OpenAI (the creators of ChatGPT) and IBM, are increasingly adopting AMD’s chips. IBM specifically highlights AMD’s potential to contribute to the development of quantum computers.
AMD CEO Lisa Su projects that the company will achieve over 35% annual growth in its top line over the next three to five years. This growth is fueled by the increasing demand for its new chips, as evidenced by accelerating revenue growth over the past two years. Conversely, Nvidia’s growth rate is showing signs of slowing.
Valuation and Profitability: A Closer Look at AMD vs. Nvidia
AMD currently boasts a market capitalization of approximately $380 billion, significantly smaller than Nvidia’s $4.5 trillion valuation. This substantial difference might suggest that AMD stock is poised for greater gains. However, a deeper dive into profitability reveals a more nuanced picture.
While AMD’s market cap is smaller, Nvidia is currently the cheaper investment when considering per-share profits. AMD’s Price-to-Earnings (P/E) ratio is higher than Nvidia’s, indicating that investors are paying a premium for each dollar of AMD’s earnings.
As AMD ramps up its AI chip development, profitability is expected to improve, potentially lowering its earnings multiple. Analysts project a forward P/E ratio of 37 for AMD, still higher than Nvidia’s 24. It’s crucial for investors to consider overall profitability, as a seemingly undervalued stock may not be so after factoring in earnings.
Over the past 12 months, Nvidia has generated nearly $100 billion in earnings, dwarfing AMD’s $3.3 billion net income. Nvidia’s larger, more profitable business and substantial financial resources position it strongly for continued success.
The Verdict: AMD’s Potential for Outperformance
Choosing between these two stocks is challenging. AMD offers potential for higher growth due to its smaller size, but this hinges on significant improvements in earnings. Nvidia, as the current AI chip leader, is unlikely to relinquish its position anytime soon, and continued AI spending will likely support its stock price. However, investors may be hesitant to further inflate an already highly valued stock.
Ultimately, I believe AMD stock will outperform Nvidia this year. While its earnings are currently a fraction of Nvidia’s, they are expected to improve as AMD scales up its AI chip business. With growth investors increasingly recognizing AMD’s potential, we may be witnessing the early stages of a substantial rally for this tech stock.
Disclaimer: David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, International Business Machines, and Nvidia. The Motley Fool has a disclosure policy.
