For the first time in quite a while, Nvidia Corporation (NASDAQ:NVDA) isn’t the hottest stock in the chip space. Nvidia stock has gained 1,690% in the past five years – but of late the rally has slowed. Nvidia is up less than 7% over the past six months.
At the moment, the fastest-rising chip stock is Advanced Micro Devices (NASDAQ:AMD). AMD now has doubled just since April, after gaining 14% following a strong Q2 report on Wednesday. And AMD’s Q2 report could signal some modest risk to Nvidia. Much of AMD’s strength is coming from categories where Nvidia traditionally has been strong.
That’s not to suggest that Nvidia is a sell, or that AMD’s rise requires Nvidia’s fall. I wrote after Nvidia’s Q1 report that I still like the stock, and see a path toward $300.
A streak of 11 straight quarters of beating consensus estimates for both sales and profits means it’s foolish to bet against Nvidia ahead of earnings. Still, at the least it looks like Nvidia has a much stronger competitor than it did just a couple of quarters ago.
The Crypto Bump
Cryptocurrency demand has affected both AMD and Nvidia stock over the past several quarters. Last year, amid the bitcoin boom, mining demand no doubt provided a tailwind to GPU sales for both companies. As Bitcoin has faded this year, there’s been a lot of speculation – and concern – about what lower mining demand might mean for both companies.
On that front, AMD’s quarter is good news for Nvidia, probably. AMD CEO Lisa Su said on the Q2 conference call that “blockchain” (which pretty much is mining) drove 6% of revenue in the second quarter, and the company was “planning very little” in terms of Q3 contribution.
That could suggest that Nvidia’s own GPU sales to miners will decline in its third quarter – and maybe even started to taper toward the end of its Q2 (which ends a month later than that of AMD). But AMD’s results also show that crypto isn’t the huge – and unsustainable – growth driver that some bears have argued.
More importantly, the ~13% gains in AMD stock as of this writing suggest that investors are beginning to ignore the crypto issue altogether. That’s probably good news for Nvidia stock.
The Datacenter Question
The gaming opportunity for Nvidia is widely understood at this point. High-end gaming demand continues to grow, which is why gaming software stocks like Activision Blizzard (NASDAQ:ATVI) and Electronic Arts (NASDAQ:EA), and even headset manfacturer Turtle Beach (NASDAQ:HEAR), all continue to rise.
The automotive opportunity gets a lot of play as well. But real profits from that business are a long way out. Automotive drove less than 5% of Q1 sales – and revenue rose just 4% year-over-year.
It’s the datacenter business that, in my opinion, is the key driver for Nvidia stock in the mid-term. And while Nvidia tries to take down dominant provider Intel (NASDAQ:INTC), AMD is coming for that business as well.
And it’s having some success. EPYC revenue and unit shipments rose more than 50% quarter-over-quarter. Not relative to Q2 2017 – but relative to Q1 2018. AMD is becoming a real player in datacenter – and that adds another strong competitor as Nvidia tries to grow in that space.
Certainly, investors don’t need to overreact. Before EPYC, AMD’s market share was essentially zero. The growth in EPYC is coming off a still-small base. But even Intel’s former CEO admitted that AMD could take 15%+ market share – and that those share gains were likely to begin this year.
Is AMD A Real Risk to NVDA?
Again, investors don’t need to overreact here. But AMD’s rise is at least a minor problem for Nvidia. Better AMD products, and they are without question much-improved over the past few years – provide better competition for Nvidia in datacenter and in gaming.
The good news for Nvidia is that both markets are growing nicely. This is not a zero-sum game. And I see the risk – particularly in datacenter – as being weighted much more heavily toward Intel. Pricing continues to hold up, per AMD’s call (and past Nvidia commentary) which means AMD is trying to undercut on price, at least not yet.
And as impressive as AMD’s run has been, it’s still added only about $8 billion in market value. Assuming all of that value came from investors believing that it would take sales that otherwise would have gone to Nvidia (which is not the case), that still would have a barely 5% impact on Nvidia’s own valuation.
Still, Nvidia investors who don’t own AMD stock need to at least keep an eye on that growing rival. At the rate AMD is growing, what is now a minor issue could become a larger competitive problem very quickly.
As of this writing, Vince Martin has no positions in any securities mentioned.
