Not long ago, NVIDIA (NASDAQ:NVDA) seemed to be invincible. By leveraging its GPU (Graphics Processing Unit) franchise, the company penetrated lucrative markets in categories like data center and AI (Artificial Intelligence). The result is that Nvidia stock has been a big winner for investors. For the past three years, the average annual return was a sizzling 53.82%!
But lately things have gotten tougher. The fact is that the Nvidia stock price is feeling the pressure of competition. The irony is that it is not from well-funded startups that have disruptive technologies. Rather, one of the scariest rivals is Advanced Micro Devices (NASDAQ:AMD). The company’s CEO, Lisa Su, has pulled off a near miraculous turnaround. And the key has been an obsession on innovation.
In fact, AMD is starting to take the lead on NVDA, which is certainly amazing. Keep in mind that NVDA has huge global scale and enormous resources, with a market cap of $95 billion. By comparison, ADM’s market cap is about $36 billion.
A stark illustration of the fight among these two semiconductor companies: AMD’s Navi-based RX 5700 and RX 5700 XT chips. These are focused on the large PC gaming market and, for the most part, it looks like AMD has the performance lead (this is based on analysis from Tom’s Hardware). There have also been notable improvements in power efficiency.
Oh, and something else: Advanced Micro Devices has made things even more difficult for NVDA stock by reducing the pricing on the chips. That is, there is negligible difference. In other words, why wouldn’t customers opt for the AMD chips?
I don’t see why not.
Now this is not a one-off. Keep in mind that the Ryzen 3000 chips have also shown to be worthy alternatives to NVDA’s offerings.
Granted, all this does not spell the doom of the company. Again, NVDA is diversified and still has a powerful R&D infrastructure. The competition should actually provide a spur to boost the innovation, which should help with the long-term.
Despite this, there are still other nagging issues with NVDA stock besides the competition with AMD:
- Even though the company remains dominant with AI chips, this segment is likely to see more and more headwinds. Note that tech giants like Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG), Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN) are building their own chips.
- While the G20 summit had good news on the trade front — with a truce between the US and China as well as a lessening of restrictions on Huawei — there are still risks. President Trump can be mercurial. China also is experiencing slower growth, which could weigh on NVDA.
- The latest quarterly report did beat expectations, but the results were still unnerving. Revenues plunged 31% to $2.22 billion on a year-over-year basis, as there was widespread weakness across gaming and the data center.
Bottom Line On NVDA Stock
It’s true that NVDA is trading at a reasonable valuation, with a forward price-to-earnings multiple of 22. The company also should get a boost from its acquisition of Mellanox Technologies (NASDAQ:MLNX), which is a leader in technologies for high-speed networks. And, yes, when it comes to the AI market, the opportunity is enormous for NVDA stock. Keep in mind that GPUs are ideal for this type of technology, allowing for super-fast performance at low cost.
But in the near-term, there is likely to be turbulence, especially as AMD gains ground and the company takes steps to stabilize the revenue base.
So, for now, it’s probably best to hold off on the stock.
Tom Taulli is the author of the upcoming book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.