The global semiconductor chip shortage has been affecting most industries since 2020 by constraining supply chains. As a result, many companies decided to build new facilities in 2021 to meet the unprecedentedly high demand for chips. However, chip shortage is likely to continue in 2022, resulting in potentially higher sales for chip-makers.  

The global semiconductor industry is poised to reach $803.15 billion by 2028, growing at a CAGR of 8.6% during the forecast period, Fortune Business Insights reports. The rising employment of chips in Artificial Intelligence (AI), the Internet of Things (IoT), machine learning technologies, and higher consumption of consumer electronic devices will act as major long-term growth catalysts for the industry. 

In today’s article, I am going to analyze and compare two chip stocks, Advanced Micro Devices, Inc. (AMD) and NVIDIA Corporation (NVDA), to determine which company presents a better buying opportunity at the moment. 

Founded in 1969, AMD is a global semiconductor company that offers a broad range of products, including x86 microprocessors, chipsets, discrete and integrated graphics processing units (GPUs), data center & professional GPUs, and others. AMD operates through two key segments: Computing and Graphics & Enterprise, Embedded and Semi-Custom. Based in Santa Clara, California, NVIDIA is one of the biggest semiconductor companies, which is mainly known for its GPUs. Also, it expands other fields as well by entering the car software, streaming, and cloud gaming markets.

Year-to-Date (YTD) shares of AMD and NVDA are both down about 26%.

Recent Developments 

On February 23rd, Bank of America analyst Vivek Arya, who rated both AMD and NVDA as a buy, said that GPU makers will continue to benefit as the graphics chip market is “still early in [the] upgrade cycle.” The analyst noted that the fourth-quarter gaming sentiment was quite solid, with record discrete GPU sales of $3.66 billion, representing a 42% year-over-year increase. It was in spite of the fact that supplies decreased 1% sequentially. Vivek Arya expects that the ongoing chip shortage will constrain GPUs supply into the 2H 2022, thus driving stronger for longer sales growth.

Recent Quarterly Performance & Analysts Estimates 

Advanced Micro Devices’ top line for its fourth fiscal quarter of 2021 rose 49.1% year-over-year to $4.83 billion, topping Wall Street revenue estimates by $310 million. The revenue growth was mainly caused by higher sales in the Computing and Graphics and Enterprise, Embedded, and Semi-Custom business segments.

It is also worth mentioning that its gross profit margin came in at 50%, indicating 560 bps year-over-year improvement due to a richer product mix. The company’s operating income increased by 112% on a YoY basis to $1.21 billion. Consequently, AMD’s fourth-quarter Non-GAAP EPS stood at $0.92, surpassing analysts’ estimates by $0.16.

A $0.94 consensus EPS estimate for the first fiscal quarter, ending March 31st, 2021, indicates an 81.46% year-over-year increase. Besides, a $5.57 billion consensus revenue estimate for the current quarter represents a 61.76% growth year-over-year.  

On February 1st, NVIDIA Corporation reported earnings for the fourth fiscal quarter of 2022. In Q4, Nvidia’s total revenue rose 52.8% year-over-year to $7.64 billion, primarily due to a 37% year-over-year increase in gaming-related revenue to $3.42 billion and a 71% YoY surge in data center revenue to $3.26 billion. Besides, its revenue related to professional visualization soared 109% YoY to $643 million. Also, NVDA surpassed the Wall Street revenue estimates by $210 million.

NVDA’s gross margin advanced to 65.4% in the fourth quarter of 2022, up 230 bps from 63.1% in a year-ago quarter. Besides, the company’s operating income stood at $2.97 billion for the quarter, a 97% increase from the prior year. Finally, NVDA revealed a Non-GAAP EPS of $1.32, beating estimates by $0.10. 

Currently, Wall Street expects NVDA’s earnings to stand in the first quarter of fiscal 2023 41.41% higher YoY at $1.29 a share. Moreover, analysts anticipate its FQ1 revenue to grow 42.54% YoY to $8.07 billion.

Comparing Valuation & Growth

In terms of Forward P/E, NVDA is currently trading at 38.44x, which is 46% higher than AMD, whose multiple is currently 26.33x. When it comes to the FWD EV/EBITDA multiple, NVDA’s EV/EBITDA multiple of 34.94x is about 76% higher than AMD’s 19.82x. 

Furthermore, AMD is projected to demonstrate higher forward revenue and EBITDA growth rates of 44.08% and 74.33%, respectively. These growth numbers exceed the NVDA respective figures by 28% and 59%.

Conclusion

I believe that AMD is a better investment than NVDA at these levels. In my opinion, AMD is positioned to better capitalize on the industry’s growth, considering its relatively better financials and higher forward growth rates. Finally, AMD looks relatively cheaper from a valuation standpoint, which grants investors a higher margin of safety on this high-beta stock.

AMD shares were trading at $107.14 per share on Wednesday morning, up $1.61 (+1.53%). Year-to-date, AMD has declined -25.55%, versus a -10.90% rise in the benchmark S&P 500 index during the same period.

About the Author: Oleksandr Pylypenko

Oleksandr Pylypenko has more than 5 years of experience as an investment analyst and financial journalist. He has previously been a contributing writer for Seeking Alpha, Talks Market, and Market Realist. More...

More Resources for the Stocks in this Article