Oct 19 2020 - AMD Vs. Nvidia: The Winner And Still Champion Is Nvidia

Nvidia's financial metrics are superior even before the ARM deal.

Nvidia's margins are vastly better than AMD's.

AMD's lower margins mean less FCF (Free Cash Flow).

Should AMD be worried that Nvidia's ARMy is coming?

Company managers are relatively the same.

AMD (AMD) and Nvidia (NVDA) are two of the hottest tech stocks on the market. Opinions vary, but both companies have many ardent supporters.

In this back and forth jostling, which company really has the best numbers and by extension, the best future?

I have written 35 articles on AMD over the years but this is my first one on Nvidia. Recently, I wrote this about AMD compared to Intel (INTC) "Intel Vs. AMD: In A 5-Year Plan Intel Wins In A Landslide" and this about AMD's potential overvaluation "AMD: Do The Numbers Support A 100 X PE Ratio?"

Interestingly, AMD's valuation has continued to climb and the fact it is currently selling at a P/E of over 160 shows that at least in the short term, my concerns of AMD's high P/E were overstated.

However, since my Intel/AMD article was published on August 12, AMD's price is virtually unchanged, .69 vs. .09.

In September, Nvidia made an offer for ARM Holdings that would expand Nvidia's CPU offerings into more traditional realms of both Intel and AMD.

Assuming this deal goes through, it will expand the duopoly of CPU chips currently controlled by Intel and AMD to the new triopoly that includes Nvidia.

Here are 5 reasons Nvidia is the superior choice at least for the moment.

1. Nvidia's financial metrics are superior even before the ARM deal

In the following table, I attempt to compare the current values of important metrics to help determine future potential. Of course, metrics will change each quarter going forward but the comparisons should give us at least a rough idea of the direction the stock price may take.

Advantage Nvidia.

2. Nvidia's margins are vastly better than AMD's

One of AMD's long-running problems has been getting their gross margins up near their competitors. Although AMD's margins are improving, they are still far, far behind both Nvidia and Intel.

With lower margins, AMD's FCF and EBITDA suffer.

Big advantage Nvidia.

3. AMD's lower margins mean less FCF (Free Cash Flow)

Nvidia's FCF is 6 times AMD's FCF. That means AMD is much more limited in investing in future products than is Nvidia.

And this is not a new problem for AMD as the following chart shows.

Note that in two of the last 5 years, AMD had negative FCF.

Big advantage Nvidia.

4. Should AMD be worried that Nvidia's ARMy is coming?

Nvidia's potential acquisition of ARM Holdings presents a threat to their current little brother duopoly role with Intel. With ARM, Nvidia would make AMD the littlest brother in the new triopoly for traditional CPU chips.

It is easy to forget that at one time AMD was aiming to use ARM-licensed chips. They bought a company called Sea Micro which made ARM servers.

No, that did not work out.

And that's not all folks. AMD also came up with the head-scratching Operation Skybridge which made a motherboard that was pin-compatible between X86 and ARM chips. You, know buy one motherboard and use either chip!

Oh boy, can't wait.

So should AMD be afraid?

No, I don't think so. AMD's bread and butter x86 chips have been gaining market share against Intel and the X86 chips will continue to dominate the high-volume number-crunching apps that dominate the current market. ARM chips may make some inroads at the low end but the X86 CAGR won't even notice it for the foreseeable future. And especially in the high-margin server market where AMD's Zen server chips will provide years of growing profits.

Advantage Nvidia slightly because of new market opportunities with ARM.

5. Company managers are relatively the same

Nvidia's CEO Jen-Hsun "Jensen" Huang and AMD's CEO Lisa Su are both electrical engineers and relatives. Roughly speaking, Huang is Lisa Su's uncle as discussed in this article.

In general, I have not been enamored with engineer CEOs of tech companies but these two electrical engineers and CEOs have changed my mind about that issue. Both of them are considered to be at the very top of technology industry management and who could argue with that.

I just wonder if there is another cousin or uncle hiding somewhere in Taiwan that could take the top job at Intel?

Advantage: Nvidia and AMD.

Conclusion

No one would argue that both Nvidia and AMD have been very successful over the last few years. The only question is which one is the better pick going forward.

Based on the 5 points I presented in this article, you would have to pick Nvidia over AMD especially with the vastly superior financial metrics and the correspondingly lower P/E ratio.

So unless you think AMD has some intrinsic advantage over Nvidia, my pick would be Nvidia.