AMD and Nvidia are two stocks that are often compared: which one is better?
NVIDIA (NVDA -0.38%) The company has been performing well since the beginning of 2023, but the same can be said for its competitor AMD. (AMD 1.59%)AMD is up 140% so far in 2023, while Nvidia is up about 700%, far outpacing AMD’s gains. This has led some investors to believe that AMD could outperform Nvidia going forward, but there’s more to that argument.
Although Nvidia’s performance is outperforming AMD’s, I believe Nvidia is a better investment than AMD because there is more to the company than its stock performance.
Nvidia’s business is booming
Both companies make hardware for all kinds of computers, but they have different ranges of product lines: Nvidia focuses on making the best graphics processing units (GPUs), and they have other product lines, but they are intended to complement GPUs.
AMD also makes GPUs, but they are not as advanced as Nvidia’s and do not have top-notch software that allows users to get the most out of their computing power, which is why in a head-to-head comparison in the GPU space, Nvidia has the edge.
But AMD’s product line isn’t just GPUs: the company has broad consumer appeal through its client division, which makes CPUs for PCs. It also makes products for a range of game consoles, and has an embedded processor line that lets clients specify highly customized chips for their applications. In addition to data center GPUs that compete with Nvidia, it also has a range of components that go into those cutting-edge servers.
AMD has a much broader reach than Nvidia, so it can’t benefit from one big trend. This is one reason why AMD has underperformed Nvidia, and AMD’s performance has been mixed across divisions.
AMD Segment Second Quarter Total Revenue YoY Growth Data Center $2.83 billion 115% Client $1.49 billion 49% Gaming $648 million (59%) Embedded $861 million (41%)
Data source: AMD. Note: YOY = year-over-year.
The good news is that while AMD’s largest segment is growing the fastest, its other struggling divisions still serve as pillars of the overall business.
Nvidia is structured similarly to AMD, though across different divisions, but its data center division is so large that the other divisions are virtually irrelevant when valuing the business.
Nvidia Segments Total Q2 Revenue YoY Growth Data Center $26.3 billion 154% Gaming and AI PC $2.9 billion 9% Professional Visualization $454 million 20% Automotive and Robotics $346 million 37%
Data source: Nvidia. Note: YOY = year-over-year. Note: Nvidia’s second quarter ended on July 28th.
The data center sector is doing extremely well and is much larger than any other sector, making NVIDIA the perfect vehicle to capitalize directly on the trend of building out artificial intelligence (AI) infrastructure, which is expected to continue for a long time.
That makes Nvidia seem like a much better option at the moment, but if AMD can be acquired at the right price, it might not be a bad investment.
AMD shares trade at a higher premium despite Nvidia’s market dominance
Usually, when two companies compete, the winner gets a higher valuation than the runner-up. But that’s not the case with AMD and Nvidia.
AMD PE Ratio (Forward) data from YCharts
AMD is more expensive than Nvidia based on forward price-to-earnings (P/E) ratios, but Nvidia has outperformed. This doesn’t make much sense. So if you’re deciding between two stocks, you’re better off buying the one that’s outperforming and cheaper than the other.
Nvidia is the obvious investment choice over AMD right now. The company has huge exposure to one of the biggest industry trends since the internet exploded. If investors want to be directly involved in the trend, buying Nvidia stock instead of AMD is the way to go.
Keithen Drury 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 has a disclosure policy.
