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NVIDIA or Advanced Micro: Which Is the Better Stock?

Zacks

Investors are keen to know what is in store for them in 2017. Technology has always remained an investor favorite due to its ever evolving nature. The field is expected to accelerate faster than ever before.

Therefore, if you invest right, you stand to make a nice profit. Technology companies are constantly on the striving to devise advanced ways to meet the growing demands of the consumer. These companies will continue to change and reshape our world as the years pass. You don’t want to be left behind, so make sure you’re investing in quality tech stocks.

We are now in 2017 and as expected there is a whole lot of talk about how markets are going to fare this year after an eventful 2016. The semiconductor market in particular is a flourishing part of the technology space and has been gaining momentum in the recent years. Since the market is dominated by a few large players, it makes sense to weigh the pros and cons before investing.

In this article, we will provide a brief semiconductor industry background before diving into the details of these semiconductor stocks, which have performed well last year and have the potential to grow further in 2017.

Background

After an awful 2015 that saw iShares PHLX Semiconductor ETF SOXX lose over 3.3%, stocks across the semiconductor landscape rebounded well last year. Notably, the ETF, which represents semiconductor stocks, witnessed a gain of approximately 36.6% in 2016, while the Technology Select Sector SPDR ETF XLK, which represents the overall technology sector, returned 12.9% last year.

Given the recovery in the U.S. economy as reflected in the recently released improved economic data, we believe that growth opportunities for semiconductor stocks in 2017 are immense.

The latest predictions from World Semiconductor Trade Statistics (WSTS) on semiconductor sales also boost our confidence in this industry space. The WSTS predicts semiconductor sales to increase 3% in 2017 and 2% in 2018.

Below, we have evaluated two tech companies i.e Advanced Micro Devices, Inc. AMD and NVIDIA Corp. NVDA that have demonstrated remarkable share price performances so far. Both these companies have generated high returns for investors so far and have the potential to exceed expectations in the days ahead.

NVIDIA or Advanced Micro?

NVIDIA and Advanced Micro are two big players within the semiconductor space. Widely known for its video gaming chips, NVIDIA has pioneered the art and science of visual computing. With a singular focus on this field, the company offers specialized platforms for the gaming, automotive, data center and professional visualization markets. Its products, services and software deliver amazing experiences in virtual reality, artificial intelligence and autonomous cars.

NVIDIA’s foray into the autonomous vehicles and other automotive electronics space has also been driving the stock higher since mid-2015. It should be noted that during the last reported quarter (third quarter of fiscal 2017), the company witnessed a 61% year-over-year jump in automotive segment revenues, mainly driven by premium infotainment and digital cockpit features in mainstream cars.

Notably, during the 2017 CES event, the company announced two important collaborations – with HERE and ZENRIN – that will expand the Live Map capabilities of autonomous vehicles Apart from this, the company announced an extension of its decade-long partnership with Audi. The two companies have now decided to put advanced AI cars on the road starting 2020.

At the event, dressed in his signature leather jacket and jeans, Jen-Hsun described how the graphic chips built by his company are taking artificial intelligence (AI) and self-driving cars technologies to new highs. It should be noted that NVIDIA forayed into autonomous vehicle and other automotive electronics space in 2015 by launching a computer vision system at the CES. It hasn’t looked back since then and has been continuously bringing new and more advanced technologies in the space.

At the beginning of 2016, NVIDIA launched DRIVE PX 2 – the world’s most powerful engine for in-vehicle AI. In Sep 2016, the graphic chip behemoth unveiled a new AI supercomputer chip designed for self-driving cars called Xavier at its GPU Technology Conference (GTC) in Amsterdam. With its sustained focus on developing new and more advanced AI technologies for self-diving cars, we believe that the company is well poised to become a leading provider of technology for autonomous vehicles.

Going forward, during the presentation, Jen-Hsun launched GeForce NOW service, through which one can rent high-performance NVIDIA Pascal gaming computer. The service will be connected through cloud data centers and will turn the consumer’s less-powerful PC and Mac computers to GeForce GTX 1080 PCs.

Apart from this, the company introduced SHIELD TV, a video streaming box with $199 price tag. The device, according to the company, will deliver unmatched performance in providing experiences like gaming, streaming and AI integration.

On the other hand, we have Advanced Micro, which is the second largest producer of microprocessors and chipsets. With the acquisition of ATI Technologies in 2006, the company became a force to reckon with in the graphics chip market.

Advanced Micro recently provided preliminary details about its most anticipated Graphic Processor Unit (GPU) architecture, Vega. The new GPU card will use second-generation High Bandwidth Memory (HBM 2), which means faster transferring of terabytes of data and much greater memory capacity.

Advanced Micro entered into a definitive agreement to form a joint venture (JV) with Tianjin Haiguang Advanced Technology Investment Co., Ltd. (THATIC) in Apr 2016. This agreement is part of the company’s efforts to gain share in the fastest growing regional data center server market.

Advanced Micro’s reported licensing deal with Intel INTC will help the company to gain more traction in the GPU space and close the market share gap with close rival NVIDIA. In this regard, we note that Advanced Micro’s Radeon Pro GPUs are in demand, as the company announced a partnership with online retail giant Alibaba for the supply of GPUs for its cloud services. Advanced Micro’s FirePro server GPUs have also been selected by Alphabet Inc.'s GOOGL Google to power its cloud platform in 2017, which again indicates the growing adoption of the company’s product.

For years, these two companies have battled each other for market share and brand recognition in every conceivable way.

NVIDIA Looks Good

NVIDIA, a Zacks Rank #2 (Buy) stock, remains one of the best performers in the semiconductor space. The stock has been clocking solid returns since the beginning of 2016 and has gained 260.8% in the last one year, outperforming the Zacks categorized Semiconductor-General industry’s return of just about 41.1%.



Notably, NVIDIA has surpassed the Zacks Consensus Estimate in the trailing four quarters with an average positive surprise of 24.9%. Over the past several quarters, NVIDIA has been witnessing significant top and bottom line growth on a year-over-year basis mainly driven by robust performance in three of its four major segments – gaming, datacenter and automotive.

The EPS estimate for the current fiscal has been revised upward to $2.43 from $2.36 per share over the last 60 days. The stock has a Growth Style Score of “B” with a long-term expected growth rate of 10.3%. The company has a market cap of $56.68 billion.

Moreover, combined with other attractive features like high return on equity (ROE) and high return on assets (ROA), the stock looks very attractive. While its ROE indicates that the company is reinvesting its cash at a high rate of return, ROA is the profit that it earns for every dollar of its assets. NVIDIA currently trades at a ROE of 26.8%, much higher than the industry average of 18.9%. Notably, the company has an ROA of 15.7% compared with the industry average of 10.7%. Also, the company has a return on capital (ROC) of 23.9%, higher than the industry average of 13.7%.

Many would argue that NVIDIA with its hefty forward P/E valuation of 42.6x compared with the industry average of 15.1x is a risky bet. We beg to differ as hefty valuations and increasing share prices do not necessarily imply that the stock does not have much upside potential left.

The stock has grabbed the spotlight with striking performances on the back of solid earnings results and strong growth projections. Keeping this in mind, we believe investing in this stock will yield strong returns for your portfolio in the short term.

Furthermore, with its sustained efforts toward attaining robust position in several emerging industries such as AI, deep learning and driverless cars industry, NVIDIA has outpaced other competitors in the space such as Intel Corp. and STMicroelectronics in terms of growth.

Advanced Micro Not Far Behind

Advanced Micro, on the other hand, also carrying a Zacks Rank #2, has surged 386.9% over the last one year and crushed the Zacks Electronics – Semiconductors industry, which increased 72.5%.



Advanced Micro has surpassed the Zacks Consensus Estimate in the trailing four quarters with an average positive surprise of 35.8%. Also, Advanced Micro reported encouraging third-quarter 2016 results wherein the top and bottom lines surpassed the Zacks Consensus Estimate.

The Zacks Consensus Estimate for Advanced Micro’s current year has remained stable at a loss of 24 cents over the last 60 days.

Although, the stock has a Growth Style Score of “A,” it has a long-term expected growth rate of 6.3%, which is less than NVIDIA. Also, the company has a market cap of $10.38 billion, much lower than its rival firm.

Moreover, combined with other unfavorable factors like low ROE and low ROA, the stock looks very unattractive. Advanced Micro currently trades at a negative ROE of 144.5%, compared to an average positive industry average of 18.9%. Notably, the company has a negative ROA of 8% as against a positive industry average of 10.7%. Also, its ROC looks very dull. It has a negative return of 15.5% as against the positive industry average of 13.7%.

Advanced Micro’s balance sheet remains highly leveraged, despite several deleveraging efforts. At the end of the last quarter, the company’s total debt was $1.63 billion. Given the continuous cash burn and initiatives taking time to yield results, we think the shares might be at a risk. Moreover, Advanced Micro’s increased costs related to product introductions will likely impact the company’s profits this year.

Conclusion

These two stocks have grabbed the spotlight with striking performances on the back of solid earnings results and strong growth projections, with their share of pros and cons. But given the current scenario, we would bet on NVIDIA because it is well-positioned to outpace the industry and is fundamentally strong enough to withstand risks.


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