We think that Advanced Micro Devices (NASDAQ:AMD) currently is a better pick compared to Nvidia (NASDAQ:NVDA). AMD stock trades at about 11x trailing revenues, compared to around 25x for Nvidia. Does this gap in AMD’s valuation make sense? We don’t think so. While both the companies have benefited in the pandemic, with an overall increase in demand for their products, Nvidia stock has rallied further due to the growing need of its data centers. Combine this with the rapid jump in demand for gaming processors, helped by the launch of new gaming consoles, and Nvidia’s soaring valuation starts to make sense. AMD, in comparison, primarily develops chipsets and GPUs used in desktops and notebooks, while also providing technology used in gaming consoles. However, there is more to the comparison. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating income and operating margin growth. Our dashboard Nvidia vs Advanced Micro Devices: Industry Peers; Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.
1. Both Companies Have Seen Comparable Revenue Growth
With Nvidia’s fiscal year ending in January, Nvidia’s ongoing FY is 2022 while AMD’s is 2021. If compared on a fiscal year basis, AMD trumps Nvidia in revenue growth between FY 2017 and FY 2020, with revenue growing 85% over this period (compared to around 60% for Nvidia). However, due to the gap in fiscal reporting, Nvidia’s FY 2021 could make for a better comparison to AMD’s FY 2020. In that case, AMD’s revenues rose 2.65x from FY $4.3 billion in FY ’16 to $11.4 billion on an LTM basis. On the other hand, Nvidia saw revenues rise 3.2x in the comparable period from $6.9 billion in FY 2017 to $21.9 billion on an LTM basis.
2. AMD Is The Clear Winner On Margins
Nvidia’s EBIT margins rose from 28% in FY 2017 to 33.4% on an LTM basis. In comparison, AMD has seen its margins rising steadily, going from -8.6% in FY 2016 to 16.2% over the last four quarters. While the data center business enables Nvidia’s operating margins to currently stand at 2x that of AMD, AMD’s stellar margin growth should not be ignored.
The Net of It All
While Nvidia’s revenue and margins stand at 2x that of AMD, the latter has also seen comparable growth in revenues and operating margins. Looking at the post-Covid recovery, Nvidia has fared only slightly better than AMD so far, with LTM revenues nearly 2x higher than the pre-Covid fiscal year (FY 2020), while AMD’s LTM revenues stand 70% higher than those in FY 2019. While AMD has only a slightly lower P/EBIT ratio of 70.4x vs Nvidia’s 74.3x, AMD has a significantly lower P/S of 11x, compared to 25x for Nvidia. We think this gap in valuation will eventually narrow over time to favor AMD, which is more attractively priced. As such, we believe that AMD is currently a better buying opportunity compared to Nvidia stock.
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