On May 24, 2017, I predicted that Nvidia (NASDAQ:NVDA) would hit $200 before Advanced Micro Devices (NASDAQ:AMD) reached $16. I was right, as Nvidia hit $200 on October 27, 2017, just two days after I upped the ante, predicting that Nvidia would hit $350 before AMD stock reached $25.
Boy, was my second prediction wrong!
AMD stock hit $25 on Aug. 27, while Nvidia is trading around $283.
Congrats to all those who bought AMD stock early in 2018; the shares have surged 145% so far this year. I definitely didn’t see that coming.
However, in my defense, it’s been some time since I’ve covered either stock, so I’d lost track of all the good things happening at AMD and the not-so-good things that Nvidia has been experiencing.
Now that one of my predictions was correct and the other was not accurate, I thought I’d make a third prediction based on the progress of the companies’ businesses.
What’s Up at AMD?
AMD’s success can be summed up in two words: market share. AMD is taking a lot of it from competitors like Intel (NASDAQ:INTC), which won’t be launching new chips for servers until late next year.
“These market share gains should persist for the next several months. During that stretch, AMD should operate in largely open fields,” InvestorPlace’s Luke Lango wrote on Aug. 28. “Intel has already announced that it won’t have next-gen chips ready until next year, and the consensus in the market is that AMD will ramp from less than 1% server market share last year to 15%-20% by next year.”
The sun is shining over AMD’s business at the moment, but clouds are forming.
How much more can AMD stock advance?
Lango thinks the shares will reach $40 by the end of 2021, 40 months from now, if the bullish case for AMD stock continues to play out. For that scenario to occur, Intel’s new chips would have to fail to capture as much market share as expected.
While that’s a bit of a hope and a prayer, I didn’t think AMD stock had a chance of hitting $25, so anything is possible at this point.
AMD CEO Linda Su has done a good job righting the ship since she was promoted to the top job in October 2014.
“Lisa Su’s understated and strong leadership along with consistent messaging to investors/customers has garnered significant accolades,” said Rosenblatt Securities analyst Hans Mosesmann in an August report to clients.
I certainly underestimated the positive effect her leadership would have on the company. We’ll see if her tremendous success continues.
What’s Happening at Nvidia?
NVDA stock was sailing along early in 2018, trading around $250; then it basically went sideways for the next seven months. The shares, however, caught fire in mid-August, when NVDA introduced the GeForce RTX Series, a new line of graphics chips that conduct light and sound more effectively, improving the gaming experience.
Moreover, as InvestorPlace’s Will Healy stated on Aug. 23, the new chips will also enhance NVDA’s latest artificial intelligence and virtual reality products.
Investors might not have liked the company’s third quarter 2019 revenue guidance of $3.25 billion, which was $90 million below analysts’ consensus estimate. However, since the company generates more than half of its sales from gaming, Nvidia’s newest graphics chips ought to boost its growth going forward.
“With Nvidia, we’re really bullish on gaming and gaming is really the key to their growth as it makes up over 50% of their revenue,” Mark Tepper, president of Strategic Wealth Partners told CNBC on Aug. 16. “Gaming and esports is going to be a huge market on a going-forward basis,” Tepper added.
I don’t know about you, but I’ll take $1.3 billion in operating income on $3.1 billion in sales every day of the week.
By comparison, AMD had $186 million in operating income in its latest quarter on $1.8 billion in revenue. That works out to an operating margin of 10%, roughly one-quarter the margins of Nvidia.
The Prediction
Over the past three years, AMD stock has averaged an annualized total return of 140%, 800 basis points higher than NVDA.
AMD has the momentum.
That said, I’ll always go with the more profitable business. There’s no question that Nvidia is more profitable.
Therefore, I’m going to predict that Nvidia will get to $500 by the end of 2020, while AMD stock will not reach $45 before that time.
May the best stock win.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
