If there’s one thing I’ve learned from the rivalry between Advanced Micro Devices (NASDAQ:AMD) and Nvidia (NASDAQ:NVDA) is that just when you think AMD stock is on the ropes, it stages a comeback.
Moving into the second half of 2020, if AMD wants to replicate Nvidia’s year-to-date performance, it will have to produce some catalysts for investors. I have no doubt CEO Lisa Su is more than capable of delivering.
In the long term, whether or not Advanced Micro Devices is able to catch Nvidia in 2020, she’s an excellent jockey to bet on.
How Far Behind is AMD Stock?
So far this year, AMD has a 18.7% return, compared to 54.1% for Nvidia, which means the latter is beating Su and company by almost a factor of three. Over the past year, Nvidia has a total return of 153.7%, nearly double AMD’s total return of 79.4%.
It seems like only yesterday that I was lamenting the fact that Nvidia, a free cash flow favorite of mine, was being dominated by the smaller competitor.
“What I do know is that AMD has delivered for shareholders over the past year in a way that Nvidia investors could only wish for. That said, I’m a believer in companies with strong free cash flow generation, and NVDA fits the bill,” I wrote on May 16, 2019.
It’s as if Nvidia’s stock heard my disappointment and sprung back to life. Of course, we know that’s not the case. Nvidia’s stock came back because it’s a fine company that’s generated $4.43 billion in free cash flow over the trailing 12 months, 41% higher than at the end of fiscal 2019 (January 2019).
By comparison, Advanced Micro Devices has generated $430 million in free cash flow in the trailing 12 months, 431% higher than at the end of fiscal 2018 (December 2018).
More importantly, from an AMD investor’s perspective, the company is generating positive free cash flow on an annual basis for the first time in a very long time.
It’s possible that during Covid-19, in a flight to quality, that more investors have chosen NVDA over AMD stock. However, the two companies returns over the last three months – 65% for NVDA compared to 37% for AMD – would suggest investors over the past year have been redeploying capital to Nvidia and away from Advanced Micro Devices.
Reversion to the Mean
In my most recent article about AMD stock, I suggested that given its meteoric rise, it’s possible that its share price will cool. Up 37% in the past three months, I don’t think you would characterize this performance as cooling. However, compared to Nvidia’s stock, it sure has.
From an analysts’ perspective, Nvidia has 33 buy or overweight recommendations out of 42 analysts (79%). This compares to 18 buy or overweight recommendations out of 40 analysts (45%). While they both have an average analyst rating of overweight, the conviction for Nvidia’s stock is much stronger.
I would bet dollars to doughnuts that Nvidia’s free cash flow has something to do with the difference in conviction. In these difficult times, having a 38% FCF margin is much more comforting than a 6% margin.
But it’s hard to feel sorry for long-time Advanced Micro Devices shareholders. A $10,000 investment in AMD five years ago is worth $231,743 today. There aren’t many stocks that can make that claim over the past five years, not even Nvidia, where a $10,000 investment has grown to $170,802.
It’s possible that both stocks will revert to the mean. However, I believe that Nvidia’s free cash gives it a little more staying power. I guess we’ll see over the next 12 to 18 months.
The Bottom Line
Investors who don’t own AMD stock are probably wondering if the company will put the pedal to the metal in the second half of 2020.
InvestorPlace contributor Todd Shriber sees the company’s growth in gaming as a big driver of revenue in future quarters. Add to this its stronghold in the cloud and data centers, and it’s not hard to understand why Shriber feels it’s got momentum heading into the third quarter.
However, given the lead Nvidia has more than six months into the year, not to mention the fact Nvidia also benefits from all three of these areas (Nvidia, arguably more), I just don’t see it happening.
As I’ve said many times in the past, I like both stocks over the long haul, but if I could only buy one, my choice remains Nvidia.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
