Nvidia Versus AMD Which Is The Better Buy?

$NVIDIA(NVDA)$ $Advanced Micro Devices(AMD)$

Lately, Nvidia has been retracing from its highs and is down about 13.7%, while AMD is down over 40% from its peaks. Given this scenario, many are wondering which stock is the better buy. In this video, we'll explore that question.

Full Disclosure: I currently hold a full position in Nvidia, which I’ve been holding for several years, but I don’t have a position in AMD. Considering both stocks are declining, should I buy more Nvidia or start investing in AMD?

Comparing the Declines

Some investors believe the stock that has fallen the most is the better deal. Nvidia has dropped 13.7% from its highs, whereas AMD has fallen 44%. However, just because a stock is down more doesn’t necessarily make it the better buy.

Looking at year-to-date performance, AMD is down 12%, while Nvidia is up 177%. Some might argue AMD is a better buy because it hasn’t surged yet, while others might prefer Nvidia due to its strong upward trend. These are not valid reasons to decide which stock is the better buy.

Key Factors to Consider

To determine which stock to buy, there are two key questions:

1. Which company is stronger?

2. Which stock offers a better valuation?

Revenue Comparison

• AMD's latest quarterly revenue: $6.8 billion, an 18% year-over-year increase.

• Nvidia's latest quarterly revenue: $35 billion, a 94% year-over-year increase.

Nvidia’s revenue growth is significantly higher due to its focus on AI data center chips, which represent 88% of its revenue. In comparison, AMD’s AI data center segment only accounts for 51% of its revenue, while its other segments—like client CPUs and gaming GPUs—are experiencing slower or negative growth.

Financial Metrics Overview

Using Stock Oracle, let’s compare key metrics:

AMD:

• P/E Ratio: 113x

• 5-Year Earnings Growth Projection: 29.6%

• Return on Equity (ROE): 3.26%

• Return on Invested Capital (ROIC): 3.14%

Nvidia:

• P/E Ratio: 52x

• 5-Year Earnings Growth Projection: 42%

• Return on Equity (ROE): 127%

• Return on Invested Capital (ROIC): 106%

Business Strength

• Predictability: Nvidia is highly predictable in terms of revenue, profit, and cash flow. AMD's predictability is low.

• Profitability: Nvidia has higher margins and returns.

• Economic Moat: Nvidia holds a stronger competitive advantage due to its AI specialization.

• Valuation: Nvidia’s valuation is fair, while AMD appears overvalued based on the metrics.

Based on financial strength, profitability, and growth, Nvidia currently appears to be the stronger company and a better buy compared to AMD. However, always consider your investment goals and risk tolerance before making a decision.

Investment Evaluation

When evaluating a company to determine if it's a solid investment, I like to examine the trends in revenue, profit, and free cash flow. Let's take a look at the financials here. You can toggle between annual and quarterly data — in this case, we’re viewing the annual figures.

We can see that the company's revenue shows growth overall, but there was a noticeable dip at one point. Net income and operating income also fluctuated, rising and falling inconsistently. This lack of consistency and predictability is the reason for the company's low ranking. A closer look confirms that net income trends up and down, free cash flow rises and falls, and cash from operations follows the same unpredictable pattern.

Additionally, stock-based compensation has increased, indicating the company is paying more to employees in stock, which dilutes shareholders. The number of shares outstanding is also rising, further contributing to dilution.

This inconsistency is why the company has a low predictability rank. Its profitability rank is also not very high. By examining key profitability ratios — like return on equity (ROE), return on capital, gross profit margins, and operating margins — we notice that these metrics show similar fluctuations. For instance, gross profit margins initially increased but then declined, and operating margins and net profit margins followed the same pattern. ROE and return on invested capital also display inconsistent growth.

When investing, I prioritize companies with a sustainable competitive advantage, or economic moat, that protects them from competitors. Using Stock Oracle, we can assess the strength of a company's moat. For example, AMD's overall moat score is 5 out of 10. The breakdown shows:

• Brand Loyalty & Pricing Power: 6/10 AMD's Ryzen and Radeon lines have gained a loyal customer base, but its brand loyalty and pricing power are weaker than Intel's or Nvidia's.

• High Barriers to Entry: 8/10

• Switching Costs: 4/10 Vendors can easily switch to competitors’ chips.

• Network Effects: 3/10 AMD lacks a strong ecosystem compared to Nvidia.

• Economies of Scale: 7/10

In contrast, Nvidia's moat score is 9 out of 10, making it a much stronger company. The breakdown for Nvidia shows:

• Brand Loyalty & Pricing Power: 9/10

• High Barriers to Entry: 8/10

• Switching Costs: 7/10

• Network Effects: 6/10

• Economies of Scale: 8/10

Financially, Nvidia's revenue, operating income, net profit, and free cash flow have shown consistent growth. Although there was a dip in 2023, this was an industry-wide issue before the AI boom. Once the AI revolution took off, these metrics surged.

Nvidia also issues fewer new shares compared to AMD, reducing shareholder dilution. Profitability metrics, like gross profit margins, operating margins, and net profit margins, have rebounded and are now at record highs. Similarly, ROE and return on invested capital have surged with the growth of AI.

When considering valuation, Nvidia's intrinsic value (based on conservative growth rates) is around $130, while its current price is $132 — making it fairly priced but not cheap enough for me to buy more. I prefer waiting until it drops below intrinsic value to around $110-$115 for a better margin of safety.

For AMD, the intrinsic value ranges between $72 (based on conservative growth projections) and $100 (using optimistic estimates). With AMD currently trading at $126.69, it appears overvalued, even with optimistic growth rates.

Conclusion

In conclusion, Nvidia is the stronger and more competitively positioned company, while AMD remains overvalued. My plan is to buy more Nvidia, but only when the price falls to a level that offers a greater margin of safety.