Unless you've been living under a rock, not using the internet, or haven't checked your portfolio in a while, the stock market is doing extraordinarily well, especially since we all expected to be in a recession by now.
And Big Tech (yes, tech!) has been the driver of this success, even in this high-interest-rate environment.
But even outperforming most of the Big Tech names are semiconductor stocks, with the best performer being the biggest name in the industry — Nvidia. The second most prominent name, AMD, isn't having too shabby of a year either.
With these two stocks up 190% and 70% YTD, what will the future hold for both of them?
Industry-Wide Growth
If you think back to the first year of the pandemic (which seems ages ago), there was a shortage of semiconductors.
Supply chain issues limited supply; car makers couldn't get chips fast enough to produce new vehicles.
Simultaneously, consumer demand for products with semiconductors increased; everyone wanted a monitor for remote work — heck, even PS5s were hard to get.
Less supply + more demand = higher price.
This helped semiconductor stocks do well for several months, coupled with the low-interest, high-growth environment at the time.
All was well until 2022 — when the Fed started raising interest rates, and stocks took a nosedive, especially tech.
But halfway through 2023, tech has recovered the fastest. And semiconductors have rebounded the most, due to the newest trend.
Artificial Intelligence
AI has been all the craze since November. It's nearly impossible to read an article on tech or the stock market without it being mentioned. And it's being discussed in offices throughout the country.
The mention of AI on earnings calls is up 77% from a year ago.
With this topic being discussed in so many places elsewhere, I'll keep it brief. But AI has been a huge driver, especially for Nvidia.
Nvidia or AMD? $NVIDIA Corp(NVDA)$ $Advanced Micro Devices(AMD)$
Both stocks have performed well, no matter what time horizon you look at: YTD, since the pandemic began, and 5-year all have rewarded investors.
Data as of 6/23/2023. "P" signifies return since 3/13/2020
But if you invested in AMD a year or two ago, you would be annoyed it hasn't done as well as Nvidia — yet, over five years, both have had similar returns and far exceeded the market. Timing is a b*tch.
There are other companies in this industry, but these are the two major players. There's an old adage to pick the winner of an industry, aka the biggest name in the industry. That would have worked well with Nvidia.
Nvidia's stock has flourished in 2023 due to the AI craze as well as a great earnings beat. For their latest quarterly earnings, they reported earnings and revenue above expectations. However, the biggest takeaway from the earnings call was the guidance for next quarter; Nvidia expects revenue of $11 billion, higher than Wall Street's estimates of $7.15 billion.
Their data center products segment is driving the strong performance.
Nvidia’s data center group reported $4.28 billion in sales, versus expectations of $3.9 billion, a 14% annual increase. Nvidia said that performance was driven by demand for its GPU chips from cloud vendors as well as large consumer internet companies, which use Nvidia chips to train and deploy generative AI applications like OpenAI’s ChatGPT.
It remains to be seen what the future holds, but management and Wall Street have lofty goals — So much so that Nvidia's P/E is trading at an all-time high.
Nvidia's 5-Year PE History
200x earnings is ALOT!
How has AMD been doing through all this? Not too bad themselves. The stock might be faring a little better than the company, though.
AMD has also benefited from this AI hype, even without being the giant that Nvidia is. And their latest earnings report wasn't as great as Nvidia's.
AMD reported (narrowly) better-than-expected revenue and earnings but offered lowered guidance. The company expects $5.3 billion in sales next quarter versus Wall Street estimates of $5.48 billion.
Their data center segment sales were up to $1.295 billion from $1.293 billion during the year-earlier period. The bad news is that's less than 1% YOY growth, compared to last quarter's 42% YOY growth.
Their PE ratio is also extremely extended.
AMD 5-year PE History
Final Thoughts
I'm a believer in regression to the mean, implying that these PE ratios have to return to normal levels. That would require either earnings to shoot up or the stock price to fall.
I'd bet on the stock price falling.
I think the market as a whole is overextended, and a pullback is due soon. I believe the same applies to these two stocks as well. However, they have the benefit of AI hype as a tailwind.
In the long term, both are great stocks to own. Nvidia is the leader in the industry, and AMD is second, but Nvidia is miles ahead for the time being.
These PE multiples are reminiscent of dot-com bubble times. I worry now might not be the best time to invest in either, but like I said earlier, timing is no meaning. I had thought the same last month but missed out on gains of 11% for Nvidia.
I personally own shares of AMD — have for years. But at present, Nvidia is looking like the more attractive investment to me.
Both stocks have offered amazing returns in the past, and I expect similar results for them in the long term future.
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