Nvidia Inc. (NASDAQ: NVDA) and Advanced Micro Devices, Inc. (AMD) have been two of the world’s most successful chipmakers in recent years. Their innovation and chip design skills set them apart others like Intel (INTC). Curiously, they are led by two related CEOs, Jen-Husn Huang at NVDA and Lis Su at AMD.
Looking at their 5-year revenue trends, they look like identical twins with NVDA revenue up 256% and AMD up 246%.
Both companies are also “fabless”, meaning they do not manufacture their own chips but outsource the actual production to others, primarily Taiwan Semiconductor Co. (TSM).
Over the past six months, prices for both stocks have fallen more than 40%, leading some analysts to wonder if their steep price increases over the past 5 years are about to come to a halt.
I wrote about both stocks in 2020 when the prices of both were rising rapidly “AMD Vs. Nvidia: The winner and still the champion is Nvidia”.
In this article, I will compare the current situation of the two companies and offer an investment recommendation for both.
Contrary to what we might guess from the introduction above, Nvidia and AMD have considerable differences in key financial metrics.
Most notable is the gross margin percentage (line 4) which shows that NVDA has a whopping 65% margin compared to AMD’s 48%.
But the metrics look different when you compare them to the relative prices of the two stocks in terms of GM percentage of MV (Market Value) and EV (Enterprise Value). In this case, AMD looks better with a gross margin on MV and EV of 6% (lines 7 and 8) compared to NVDA’s 4%.
This would indicate that NVDA shares may be overvalued on a relative basis.
The overvaluation can also apply to the two orange PE Ratio and Price to FCF lines, both of which make AMD look undervalued relative to NVDA’s current valuation.
Note that AMD’s recent results as of May 3 of the first quarter of 2022 are included in the following table.
But looking at the gross margins over the past 10 years, we can see that NVDA has consistently had GM in the 50s or low 60s for the entire 10 years, while AMD has spent most of those years at less than 40%.
Part of this discrepancy is due to the low markups AMD receives on game consoles made for Sony and Microsoft. As far back as 2014, AMD CFO Devinder Kumar explained how AMD struggled to get game console margins above 20%.
When asked specifically if AMD could increase its console chip margins to over 20%, Kumar said yes. Source: kitguru.net
With a sizable portion of its revenue only generating margins of over 20%, AMD will most likely struggle to achieve and maintain overall margins in the 50% zone, let alone NVDA’s 60%+ margins. .
Analyst ratings start to drop for Nvidia but not for AMD
If we look at Seeking Alpha plus Wall Street analysts combined, we can see that both stocks are highly recommended with a combined score of 78 buys and only 6 sells.
But interestingly, when we look at Quant Ratings, AMD is a Buy with a score of 4.47 while Nvidia is a Hold with a score of 3.41. Maybe the differences in financial metrics I described above have something to do with it since the note accompanying the Seeking Alpha Quant notes says “it gives more weight to the metrics with the strongest predictive value” .
Nvidia is in a duopoly while AMD is in two duopolies
The GPU (Graphics Processor Units) market is essentially Nvidia and AMD. Intel also manufactures GPUs for its own products, but the graphics card market is mostly dominated by NVDA and AMD.
It looks like AMD gained ground on Nvidia in 2021 compared to 2020.
When it comes to processors and server chips, it’s basically Intel and AMD, both of which have manufactured the X86 processor chip since the release of the IBM PC in 1982.
Recently, Nvidia announced he abandoned his attempt to buy ARM ltd. of the Softbank Group (SOFTBY). Arm Ltd designs CPU chips for a variety of applications including mobile phones but is also used in a few PCs and even servers. It would have been an interesting combination to allow NVDA to compete more directly with both Intel and AMD, but in the end it didn’t.
In the first quarter of 2022, Intel regained market share from AMD, bringing current comps back to where they were in 2007.
Note that although AMD effectively operates in two duopolies, in both cases it is the smaller company. This creates a definite disadvantage in terms of management, investment and marketing.
Nvidia has a more diverse customer base than AMD
AMD has a much more concentrated customer base than Nvidia.
Collectively, our top five customers represented approximately 54% of our net sales, with Hewlett-Packard Company, Microsoft Corporation and Sony Corporation each representing over 10% of our consolidated net sales. Source: CSI Market
We depend on a small number of customers for a significant portion of our business and expect that a small number of customers will continue to represent a significant portion of our revenue in the future. If any of our major customers were to decide to stop purchasing our products, or if any of those customers significantly reduced their business or demand for our products, our business would be materially adversely affected. Source: 10-K page 39
On the other hand, Nvidia sells to many different customers, as their 10-K shows:
They are available in industry-standard servers from all major computer manufacturers, including Cisco, Dell Technologies Inc., Hewlett Packard Enterprise Company, Hitachi Vantara, Inspur Group, and Lenovo Group Limited; from all major cloud service providers such as Alicloud, Amazon Web Services, Baidu Cloud, Google Cloud, IBM Cloud, Microsoft Azure, Oracle Cloud and Tencent Cloud; Source: 10-K
Nvidia also licenses its proprietary software to various customers:
In addition to software provided to customers as an integral part of our data center computing platform, we offer enterprise software products on a stand-alone basis as a license or perpetual subscription. Source: 10-K
So, Nvidia’s greater customer diversity would seem to be a long-term competitive advantage.
Neither company did well in the last recession
If you’re concerned, like me, about a looming recession in the next year or 18 months, knowing how a company fared during the last recession can provide insight into investing.
December 2007 to June 2009 was the last recognized recession period and NVDA (down 65%) and AMD (down 60%) fared poorly. This was much worse than the broader market (S&P 500) which was down only 38%.
Both Nvidia and AMD have had a great run over the past few years. But since November of last year, they have both fallen by more than 40%.
On May 3, AMD released what at first glance appear to be blockbuster numbers for Q1 2022 versus Q1 2021. But relative to the last quarter (Q4 2021), there were some troubling signs such as operating margin down 9% and earnings per share down 30%.
The obvious investment question is whether now is the right time to buy these two former high flyers.
If you’re worried that an impending recession (and/or substantial market decline) is overstated, I’d recommend AMD as a buy due to its continued success with the high-margin EPYC server chip and its current projection of $26 billion in revenue for 2022, up 60% from 2021.
However, given the state of the world with chip and logistics issues, very high inflation, and war in Europe for the first time in 77 years, I’m very suspicious of big drivers like NVDA and AMD. Without an official recession, they’ve been hit hard, which makes me wonder where they’ll go if/when a real recession hits.
With very high PE multiples and even higher price/FCF ratios, I think both stocks are a sell until economic and market conditions improve.