Best Buy: Advanced Micro-Devices vs. NVIDIA
- During the summer of 2020, NVIDIA overtook Intel in size measured by market capitalization.
- AMD is making a similar effort as its new processors and GPUs are helping it gain market share.
- Intel still generates nearly $ 80 billion in sales per year, and there is a huge opportunity for NVIDIA and AMD to gain more share at the expense of “Chipzilla”.
It’s been a good year for NVIDIA (NASDAQ: NVDA) and Advanced micro-systems (NASDAQ: AMD) shareholders. The prices of both stocks have more than doubled in the past 12 months. A new era of computing is opening and semiconductor designers have positioned themselves as industry leaders.
Meanwhile, Intelligence (NASDAQ: INTC) left the door open to disruption. With more than $ 78 billion in annual Intel sales to shrink (compared to just under $ 15 billion and $ 8.6 billion in sales for NVIDIA and AMD), there is plenty of room for the two upstarts continue to grow. If I had to choose one, I would choose NVIDIA, but AMD remains a more than honorable bet on the future of technology.
NVIDIA establishes itself as a computing accelerator
NVIDIA’s days as a simple video game hardware company are long gone. Of course, gaming remains the most important end-market for the graphics processor (GPU) pioneer. In fact, sales to video gamers continue to rise, largely this year thanks to the release of the company’s RTX 30 series, which once again pushes the boundaries of graphics performance.
But NVIDIA’s innovation has propelled the use of the GPU far beyond video games. Data centers are designed to overtake the game as the company’s biggest selling point. NVIDIA expanded its core competencies with the acquisition of network hardware company Mellanox. The reasoning is that while GPUs are well suited for speeding up the computation of complex tasks like AI, this computational power can be limited if the network cannot handle the amount of data being processed. Hence the company’s decision to pack its base GPU with Mellanox network hardware for data center and cloud computing operators.
More recently, NVIDIA also announced it developed a data processing unit (DPU), another type of specialized chip that coordinates the flow of data to, from and within a data center. The DPU is based on the ARM Holdings architecture, the semiconductor designer NVIDIA is in the process of purchasing. High-end graphics for video games will always be a big part of NVIDIA’s business, but it’s clear that its growth hinges on high-growth areas like cloud computing and AI. And through its research and development activities in this critical area, it is now leading the charge on this front.
AMD is also ramping up its R&D game, and profits should follow.
AMD has long played the second role behind Intel with its line of processors, and more recently ahead of NVIDIA with graphics cards. But the company has made great strides in recent years, especially after offloading its GlobalFoundries manufacturing segment during the 2008-09 financial crisis. Since then, AMD has used its more streamlined operation to ramp up research and development, and those efforts have started to pay off.
With these developments, AMD chips are finding their way into a growing number of desktop and laptop PCs, especially as Intel has fallen behind the technology curve in recent times. It doesn’t enjoy the same kind of growth as NVIDIA, but data centers are also a growing market for AMD. The company’s goods are also featured in Sonyof the PlayStation 5 and MicrosoftThe next generation Xbox Series X game consoles. Simply put, this company is no longer an outsider in the semiconductor world.
In order not to be outdone in the acquisition race, AMD also recently announced its intention to buy a field programmable gate network leader Xilinx (NASDAQ: XLNX) in a $ 35 billion stock deal. This opens up another front in its assault on Intel, which has embarked on its own in the on-premise programmable chip segment by acquiring Xilinx competitor Altera in 2015. Xilinx has much higher profit margins than AMD, so its addition will help AMD continue its path from a barely a moderately profitable chip company to a technology design leader with a strong research and development pipeline.
Why NVIDIA is the best buy
I think NVIDIA and AMD both have a bright future ahead of them. But personally, I prefer NVIDIA, for one simple reason: profit margins. Its chip technology helps it generate sufficient free cash flow (revenue minus operating and capital expenses) in good times and bad, with a free cash flow profit margin of nearly 29%. in the past 12 months. AMD, on the other hand, continues to make headway here – it was operating in negative free cash flow territory in 2019 during a slowdown in industry sales.
Profits are important for semiconductor companies. They allow them to invest money in the development of new technologies, the key to supporting long-term growth and countering the cyclical nature of businesses. AMD is on track to improve its profit profile, but NVIDIA is leading on this front.
Nonetheless, AMD remains a solid game on the future of computing needs, especially when it adds Xilinx to the mix. When in doubt, buy a little of both. I think NVIDIA and AMD hold great promise over the next decade and beyond as they encroach on Intel’s ground and gain more market share.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.