AMD and Nvidia’s Valuation Showdown: Which Stock Offers More Upside?

InvestorPlace.com contributor Rich Duprey recently suggested that Advanced Micro Devices (NASDAQ:AMD) stock is a better buy than Nvidia (NASDAQ:NVDA). 

Counterintuitively, the fact that Nvidia stock has outperformed AMD threefold over the past year does help make the argument that the former is ready to cool off while the latter has plenty of momentum left in the tank due to unrealized and underappreciated AI potential in the months and years ahead. 

Nvidia might be the AI leader, but AMD sstock is coming on, says Duprey, suggesting that its MI300X chip “is cheaper and more powerful than its rival’s H100 chip.”

I’ve always thought that AMD and Nvidia CEOs Lisa Su and Jensen Huang are two of America’s best leaders. I suspect that the two companies’ competition will continue for years to come. 

Here are three reasons you might want to buy AMD stock and NVDA. 

AMD and NVDA Tend to Outperform at Different Times

Last November, I argued why it makes sense to own both stocks. 

In my experience, the two stocks are like non-correlating assets in that they tend not to outperform simultaneously. Let me be clear: With AMD stock up nearly 90% over the past year, you would hardly describe its gains as underperformance. However, all performance is relative, and Nvidia’s gained nearly 253% over the same period. 

I’ve followed the competition between these two companies since 2017. That year, Nvidia spanked AMD in the markets. The following year, AMD returned the favor. Over the next five years, when one was booming, the other wasn’t doing much. The last time AMD outperformed NVDA was in 2020 and early 2021. Since October 2022, it’s been all Nvidia. 

The gap will eventually narrow, and as Duprey suggests, maybe sooner than we think. 

Its AI Business Is Getting Stronger

As InvestorPlace’s Joel Baglole pointed out in mid-March, AMD is on track to generate $3.5 billion in revenue from its AI chip sales in 2024, 75% higher than its projection last fall. Given the demand, it wouldn’t surprise anyone if its revenues were significantly higher than $3.5 billion. 

In many markets, you want to be number one. However, AI’s potential is so significant that being second-best isn’t bad. Investor’s Business Daily compared AMD’s current competition with Nvidia to the competition it carried out for years with Intel (NASDAQ:INTC) with PC and server chips. 

“Historically AMD has been a No. 2 in pretty much every field that they’ve competed in. And a compelling one,” Piper Sandler analyst Harsh Kumar told Investor’s Business Daily on March 14.  

The AI chip market in 2024 is projected to reach $67 billion, up 13.1% from 2023. By some estimates, AI chip revenues will grow to $341 billion by 2033, a compound annual growth rate of 31.2%. 

To be second best in this market would still be hugely profitable growth for Su and the rest of her management team.

The Valuation Gap

All valuations run through Nvidia. If AMD is to keep moving higher, it needs to demonstrate why it makes a more compelling buy relative to its larger competitor. 

One of the metrics I use to assess how cheap or expensive a stock is is free cash flow, defined as free cash flow divided by enterprise value. 

In fiscal 2024 (January year-end), Nvidia had a free cash flow of $27.02 billion. Based on an enterprise value of $2.22 trillion, its free cash flow yield is 1.2%. Anything below 4% is expensive. AMD’s free cash flow in 2023 was $4.15 billion. Based on an enterprise value of $290.37 billion, its free cash flow yield is 1.4%, 20 basis points higher than NVDA, but well below the 4% floor I look for. 

Another metric to consider is the PEG ratio, a stock’s price-to-earnings ratio divided by projected EPS growth. A stock with a PEG ratio below 1.0 is considered undervalued. According to Mornningstar.com, AMD’s is 32.24, while Nvidia’s is 1.55.       

AMD’s looks high relative to Nvidia’s. I think I’ll check another source. 

Yahoo Finance’s EPS estimate for 2024 is $3.62 a share, 37% higher than in 2023. Based on a share price of $180, its P/E is 49.7, for a PEG ratio of 1.34 (49.7 divided by 37). Nvidia’s fiscal 2025 EPS estimate is $24.58 a share, 90% higher than in 2024. Based on a share price of $912, its P/E is 37.1, for a PEG ratio of 0.41 (37.1 divided by 90).

From this perspective, AMD is more expensive.

While I like Lisa Su and AMD, if I could only own one, it would be Nvidia. If you own AMD, I wouldn’t sell. If you don’t own either, Nvidia is the better buy. 

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.