Semiconductor stocks have been notching successive monthly wins, with most major names handily beating expectations. This has lifted sentiment recently, likely spurring further Wall Street price target hikes and buying demand. However, one key question facing investors is which tech stock offers superior risk-adjusted returns: AMD (NYSE:AMD) or Nvidia (NASDAQ:NVDA)?
AMD has lagged Nvidia over the past year in terms of price performance, despite slightly topping Q3 earnings and revenue forecasts. Specifically, the company generated $5.8 billion in sales, up 4.2% annually. Meanwhile, Nvidia once again blew past expectations, with Q3 earnings per share coming in at $4.02, beating by $0.63, but more importantly revenue grew to $18.1 billion this past quarter, representing an incredible growth rate of 205%. This beat was driven by rip-roaring data center and gaming chip demand.
However, both names have been retreating recently, as investors look through the euphoria surrounding AI and data center growth. Nvidia dipped below $500 on concerns over its steep valuation, given the stock has risen nearly 250% year-to-date. In my view, even if Nvidia continues trouncing estimates in the near term, this partly owes to rampant speculation over AI’s expansive long-term potential rather than fundamentals warranting its rich multiples. The disconnect between Nvidia’s nosebleed valuation and its financials remains stark. Though the company exceeded top and bottom-line estimates by around 15 percentage points, its premium is still astronomical even for a semiconductor high-flyer.
AMD’s More Reasonable Valuation Allows for Execution Shortfalls
Conversely, AMD looks like a relatively better-valued stock presently. Now, its growth lags Nvidia’s tremendously. However, its forward price-sales multiple of 8.5-times seems less extreme and bakes in slower expansion going forward. Specifically, if 2024 growth rebounds to 17% as analysts expect and continues, AMD’s 2027 revenue will put its forward price-sales ratio approximately 4.6-times. Though lofty in absolute terms, this at least seems more tenable than Nvidia’s present premium.
Currently, NVDA stock still trades at 21-times sales, essentially assuming the company’s revenue growth beats will persist indefinitely. This is patently untenable, considering even 2031 earnings and sales assumptions place its forward price-earnings and price-sales ratios at 8.5-times and 4.9-times, respectively. Of course, no one knows precisely how substantial the total addressable market for AI will become, or whether Nvidia can perpetually expand earnings by triple-digit percentages. But competition will likely intensify with Intel (NASDAQ:INTC) and AMD itself churning out capable AI chips over the coming years.
Hence, while richly valued on an absolute basis, AMD stock offers a superior margin of safety. Strong momentum and doting sell-side analyst commentary could propel Nvidia above $500 again soon. But economic gravity will eventually weigh on the stock, given the yawning gap between its growth prospects and premium valuation. Moreover, the recent drama with OpenAI demonstrated that risks abound even in promising futuristic technologies like AI.
All things considered, I don’t have a raging bullish near-term perspective on AMD either. But its superior risk-reward balance exemplified by its far lower multiples could enable outperformance versus Nvidia in the long-run despite slower growth. Nvidia’s historically high valuation largely reflects its tremendous growth trajectory already, while AMD has more upside ahead, as macro conditions improve and execution normalizes.
Long-Term Price Targets Favor AMD Stock, Based on More Attainable Growth
In summary, my five-year price target stands at $250-$300 per share for AMD stock, compared to $600-$800 per share for NVDA stock. These projections make the key assumption that the AI sector will continue to grow rapidly, without the current speculative fervor drying up completely. Of course, the odds of major deviations from base case scenarios are high given AI’s relative nascency and the potential for rapid competitive catch-up.
Clearly, Nvidia enjoys superior momentum that could lift shares above $500 per share again soon. However, its premium valuation will eventually constrain further multiple expansion, especially as chip competition intensifies. This makes AMD’s modest growth projections and lower forward multiples the preferable bet for investors focused on risk-adjusted returns over the next decade.
In essence, Nvidia’s lofty valuation bakes in expectations it will almost perpetually grow earnings by over 50% annually for the foreseeable future. Any hiccups or heightened competition will hit its best-in-class valuation hard. Meanwhile, AMD’s ownership of the valuation “doghouse” means it faces less downside pressure. With still-sizable TAMs remaining in PCs and data centers, along with potential share gains by both Intel and other players, pragmatic investors could do far worse than buying AMD stock right now.
On the date of publication, Omor Ibne Ehsan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.