AMD Will Never Be NVIDIA. Here’s Why
Table of contents
AMD stock vs NVIDIA stock – which is best? Is AMD a buy now? These are the types of questions we get asked frequently at Nanalyze. Today we’ll analyze AMD stock and look at their valuation, margins, and profitability to see if there’s some “there there.” We’ll also compare their stock to the leader in the GPU space: NVIDIA.
When we first compared AMD to NVIDIA eight years ago, it seemed that AMD wasn’t quite committed to AI. Today that’s changed as AMD is doing everything they can to convince investors they can steal market share from NVIDIA. Is AMD a pick-and-shovel play on AI? Why have shares fallen 43% over the past year? We’ll answer those questions and more in today’s riveting presentation. Honestly, I haven’t been this excited since my high school crush slid into my DMs and tried to sell me insurance.
So let’s set the stage here. We’ve written nearly 2500 research pieces since we began publishing content over 10 years ago. About 390 of those pieces were on AI and most of them were before AI became a household name. We’ve been watching the AMD versus NVIDIA story since we first identified NVIDIA as the only artificial intelligence stock worth watching nearly a decade ago. Now the last time we compared AMD and NVIDIA was at the start of 2024.
We came away with some key takeaways. Their respective valuations weren’t that far off though NVIDIA was richer. And someone correctly pointed out that we shouldn’t have been looking at price to sales, so our simple valuation ratio which looks at revenues, because not all revenues are created equal and they were spot-on.
AMD Vs NVIDIA – Valuation
So we’re going to take a look at that using earnings today. Now NVIDIA’s valuation premium seems to make sense because NVIDIA is growing faster and has stronger cash flows. AMD appears to be playing catch-up and analysts hoped their new MI300 chip would allow them to steal market share from NVIDIA or at least pick up some of the crumbs with all the strong demand for AI hardware.
Now the bear case for AMD was that their platform just couldn’t compete with the full stack on offer from NVIDIA. So the CUDA software component. And at that time, when we last compared the two, AMD didn’t have any data center revenue growth taking off. You can see these charts here, you see how NVIDIA had just started taking off and AMD was still sitting fairly flat.
Well, that all changed. And here you can see the quarterly data center revenues for AMD. You see that in the summer of 2024, they started their spike and they’ve been steadily heading upwards ever since. So last quarter they were essentially double from the year prior. And this comment here from this individual, it says, “AMD is a clear buy to me. They really surprised me over the last 5 years and I believe they will continue to do so.” So we had some banter with this individual about the other segments that had performed quite strongly.
Well, what do you think happened to the share price? I think this is an excellent example of a story seeming to be quite compelling but the stock not matching the story. This happens all the time. Well, since that piece, we see here that the S&P 500 appreciated about 12%, NVIDIA went up over 100% cuz that’s what NVIDIA continues to do, and AMD actually fell 37%.
Why? Well, first of all, if you liked AMD before, you’re going to be loving it now. Because from our perspective at least, since the last time we looked, they’ve actually done better than we thought. Now the first thing to note here is on a blended basis. AMD’s quarterly growth is just not that compelling. And here you can see a chart which shows the last four quarters for NVIDIA against AMD and you see how earlier on both of these companies sort of tracked in terms of their revenue trends and then NVIDIA just blew it out of the water, right?
So when we look at last year’s performance for AMD, we see data center revenues as I said up very strongly, total revenues up 14% year-over-year. Now that wasn’t very much compared to all that strong data center revenue growth and the reason for that is quite concerning. Their other two segments here, Gaming and Embedded, saw revenues fall significantly.
Now for data center, one thing to note here is that if your revenues are up 94% and your operating income is up 175% year-over-year, that means you’re actually getting more profitable. And then look at the other two segments, you see Gaming and Embedded. The operating income for these segments is actually declining more than revenues. That means they’re becoming less profitable over time. That’s not good.
Going back to that comment about not all revenues being created equal, these are two great charts. The one on the top shows gross margins for NVIDIA. And we had a debate about this in our last piece in NVIDIA where we’re arguing that the strength of those gross margins sure relates to the more profitable data center segment now making up, what, 80-90% of NVIDIA’s revenues.
But it’s also pointing to the pricing power that they have. You’ve seen these comments, right? So various CEOs sitting down with Jensen saying, “We’ll do anything to buy your equipment,” right? And the price from third-party sellers, just through the roof. So when you have demand that that’s that strong you can pretty much charge anything.
AMD Vs NVIDIA – Margins
So when you look at the gross margins for AMD, they’re a different story. So they sitting there, they’re slowly going upwards. They’re around 50%. Now here’s the real interesting charts. These reflect operating margins, so essentially profitability. NVIDIA is extremely profitable when compared to AMD. You can see the last operating margin recorded for NVIDIA on these chart at 62%. And look at the same chart for AMD. This is concerning.
That red line shows where they’re actually not profitable, right? So they’re just ekking upwards there to break out of being a nonprofitable business. So their operating margins around 7%. 62% compared to 7%. This is apples to oranges in terms of how competitive these firms are when it comes to being profitable.
Why is AMD Stock Down?
Now we asked Grok why AMD’s stock fell over the past year and it provided up some interesting reasons here. Grok’s getting quite good.
Disappointing AI chip sales growth. Well, probably we would disagree with that. I’ll show you why in a second. NVIDIAs dominance in AI chips. Yeah, yeah, we get it. External factors. US China trade tensions, we’re going to touch on that because AMD is going to be impacted by the recent announcement for NVIDIA’s H20s. And this last bullet point here, high valuation. So that may very well be the case.
So when we last looked at AMD, we saw the MI300 chipset here, analysts were expecting $10 billion in 2024 data center revenues. Actuals were $12.5 billion. So they did better than what analysts expected, all right?
And when you look at the road map for AMD, you see here these different chips they’re planning to bring to market. They talk about this being the fastest-growing product in AMD history. Of course, it is, right?
Data center profitability. So when it comes to what percentage of total sales data center is becoming for AMD, you see here. Read this from right to left.
So it was 26% of sales in 2022, moved to 29% of sales in 2023, and in 2024, now it’s close to half of their sales. But look at operating margin, right? So it hasn’t really done much. The idea here would be, as with the case with NVIDIA, you saw where this spike in data center sales sent profitability through the roof, right? You’re selling a component that’s in high demand, you should be able to charge a premium for it. You should be able to produce it in such a manner that you can charge that premium. That’s not the case for AMD. So NVIDIA’s operating margin for Compute and Networking, so that’s largely their data center segment, was 71% last year. Compare that to a 28% operating margin for AMD. Again, these two companies are very different.
AMD’s Disappointing Last Quarter
So last quarter, that’s the last data point we have, the data center revenues fell short of analyst expectations. So they came in at $3.85 billion versus the $4.15 billion they were expected. Next quarter, they’re expecting a sequential decline of around 7%. Whatever reasons there might be for that, it just doesn’t look good. Sure, there’s probably some seasonality there.
And the CEO talks about tens of billions of dollars in annual revenue coming from their AI chips. Well, they’re, what, at 12 billion now. So another 8 billion and they’re at tens of billions, right? Over 20 billion would meet that criteria. They said in a recent filing that they may see charges, so a write-off, of approximately $800 million in inventory relating to these licensing requirements that have now emerged for NVIDIA implying that they’re also going to be subject to some of those problems too.
Now, like NVIDIA, it’s very tough to gauge how much revenue AMD is seeing from China. So they only show billing location, just like NVIDIA. We don’t actually know how much China is buying. So that’s going to be really interesting to see the fallout from that this year. It’s really a new licensing requirement. So maybe they get the licenses and nothing changes. We don’t know. We have to see.
AMD Vs NVIDIA – Profitability
When it comes to profitability, they always say, you know, profits aren’t an opinion, cash is a fact. Well, NVIDIA is so profitable that they’re just printing cash and that gross margin they have is a indicator of potential cash flows. And cash flows fuel R&D so that you can keep that competitive advantage. That’s why NVIDIA keeps talking about all this stuff they’re building, right? Because they have a ton of cash to build stuff with. Free cash flow is what’s going to fuel future growth. You see along the bottom here operating cash flows for AMD, last year, $3 billion. For NVIDIA, $16 billion.
When you look at the new Blackwell chips that NVIDIA is debuting, so you see here that the same horsepower essentially can be provided at a four times reduction in power, right? So conserving energy means that these servers cost less to run. Now I saw some interesting metrics coming out of China for some of their chipsets that Huawei is building and they’re showing comparable performance to NVIDIA’s current hardware. Hopper, not Blackwell.
But when you look at the energy that’s required, it’s significant. Now energy is a lot cheaper and more widely available in China. So you need to keep these things in mind. Now when it comes to valuation. Calculate them yourself. So they start to become intuitive. So if we look at the present price-to-earnings ratio for AMD and NVIDIA, I’ve spelled these out here.
You see AMD’s very expensive, 87 P/E compared to NVIDIA at 34, compared to NASDAQ at 28. So both firms would be considered overvalued. However, look at what analysts expect for next year, all right? So that’s a forward P/E. So when you calculate that, you see AMD’s really supposed to see their earnings spike to give them a forward P/E of 14, NVIDIA 18, compared to NASDAQ at 22. So using the expectations that this is the average analyst expectations, both of these firms are cheaper from a Forward P/E perspective than the NASDAQ.
Takeaways
Now AMD is not overvalued, if you believe the average analyst. To have the same forward price-to-earnings ratio as NVIDIA, they would trade at $109. But here’s the question – should they? Probably not. Because, as we’ve shown you today, NVIDIA is a much more competitive business, a much stronger firm with a lot more cash that they can do things with. Now the question that came up in our NVIDIA piece, and I think it probably merits a look, we may look at this in the future, what does baseline growth look like for these companies once this massive investment surge lets up?
So there’s going to be some sort of baseline that emerges and this comes down to how often they’re going to have to be refreshing all this hardware, this $80 billion of hardware that Microsoft is purchasing this year. How often are they going to have to refresh that? That probably merits a look to try to gauge what that looks like once we get past this massive push by hyperscalers to invest in hardware.
Now is AMD going to be able to displace NVIDIA while they’re spending a fraction of R&D? Probably not. They’re not as profitable as NVIDIA and their revenues just aren’t as equal. So it comes down to this. If you liked AMD before, you would be loving it now because it’s frankly looking better than the last time we looked. These are volatile tech stocks. The price of these stocks moves all over the place, right? If you want to talk about stock prices, always put them in the context of valuation, as we’ve tried to do today.
Also, pay attention to market and industry performance. So this is another thing we always joke: Whenever my stonk goes up, it’s because of my investment acumen, right? I’m the next Nostradamus. But when my stonk falls, it’s market risk at play, right? So when AMD is showing sub-par performance, you need to compare that to the semiconductor industry as a whole. I’ve done that here.
This is a five-year price chart. It just shows that over the past 5 years, AMD returned 56% compared to the S&P 500 or the market at 85% versus 191% for the semiconductor industry. So AMD’s underperformed. However, if you take that back to 20 years, it starts to paint a different picture.
But remember that AMD, and you can see it in this chart, is going to pace the semiconductor industry returns to a certain extent. It’s called industry-specific risk. It’s also market risk, right? It’s going to follow the broader market as well. And I worked at MSCI, our tools let you actually dissect the risk in your portfolio to see where your performance was coming from. It’s quite interesting.
Conclusion
So going back to the garage, as I used to say at Hewlett Packard back in the day, we apply the same methodology consistently across all stocks. We always choose leaders over laggards. And AMD is playing catch-up here. I mean that’s really obvious.
And there’s plenty of opportunity, I think, for both these firms, if you believe the large TAM numbers, right? But we still have a hard time seeing sufficient reasoning why you’d want to hold AMD over NVIDIA for the reasons that we’ve talked about today.
Now we recently did this piece on some headwinds that might be blowing for NVIDIA. This is well worth a watch. It touches on those margin concerns I talked about earlier. Click that and give it a watch next, please. That’ll help support our channel. Thank you very much.
Share
