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3 Reasons to Buy AMD Stock Over Nvidia

Computer systems design services company Nvidia (NASDAQ: NVDA) stock has delivered impressive gains of more than 70% so far this year, beating rival Advanced Micro Devices (NASDAQ: AMD) handsomely as investors have appreciated the graphics card specialist's robust revenue and earnings growth.

However, as the chart below shows, AMD stock's below-par performance seems a tad surprising given the pace at which its top and bottom lines have been growing. But AMD investors shouldn't get discouraged, as the chipmaker has enough growth drivers in the bag that could send the stock soaring.

NVDA data by YCharts

In this article, we will look at the catalysts driving AMD's growth and check what makes it a better bet than Nvidia right now.

AMD has better access to the fast-growing console gaming market

Video game consoles have been in hot demand since last year. The launch of Sony's (NYSE: SONY) PlayStation 5 (PS5) and Microsoft's (NASDAQ: MSFT) latest Xbox consoles has triggered a massive upgrade cycle that has created a supply shortage. Sony has already sold over 10 million units of the PS5, while Microsoft had reportedly moved 6.5 million units of the Xbox Series S and Series X consoles by the end of June 2021.

According to third-party estimates, Sony could end 2021 with sales of 17.9 million PS5 consoles, up from last year's 4.5 million units. The PS5's sales momentum could remain strong with Sony expected to ship over 33 million units in 2022, 50 million units in 2023, and 67 million units in 2024. Meanwhile, sales of Microsoft's Xbox Series X are expected to jump from an estimated 3.3 million units in 2020 to 12 million units in 2021, and 37 million units in 2024.

AMD supplies semi-custom chips to both Sony and Microsoft for their latest consoles. Nvidia, on the other hand, supplies chips for Nintendo's Switch consoles. The Japanese video gaming company estimates that it could sell 25.5 million units of the Switch in the current fiscal year that ends in March 2022.

Image source: Getty Images.

However, it is worth noting that the PS5 and the Xbox Series X are pricier consoles. The PS5 digital edition is priced at $399, while the standard edition costs $499. The Xbox Series X is priced at $499. Nintendo's Switch costs $299 for the standard model and $199 for the Lite version. As a result, the PS5 and the Xbox Series X have higher production costs as compared to the Nintendo Switch, which indicates that AMD may be getting more revenue from each unit of Sony and Microsoft's consoles due to a higher bill of materials.

Additionally, the stronger volumes generated by the latest PS5 and Xbox consoles mean that AMD is in a better position to take advantage of the gaming console opportunity. Throw in the fact that AMD will be supplying its chips for a new handheld gaming console that could rival the Switch, and AMD's console revenue could keep getting better.

AMD's revenue from the enterprise, embedded and semi-custom segment, which includes sales of custom chips to console makers, jumped 183% year over year in the second quarter to $1.6 billion. AMD can sustain this terrific momentum thanks to the secular growth of the console gaming space.

AMD has a stronger position in the server market

AMD sells processors that are used in data center servers, and Nvidia is yet to launch a chip to target that lucrative market. While Nvidia is going to enter the server processor market with its Grace central processing unit (CPU) in 2023, AMD is already making robust progress in this space against Intel.

AMD's share of the server CPU market jumped to 9.5% at the end of the second quarter, up 3.7 percentage points over last year, according to Mercury Research. Intel controlled the rest of the market but has been losing ground to AMD. Vivek Arya of Bank of America estimates that AMD's server market share could increase to 25% by next year.

AMD sees an addressable revenue opportunity worth $19 billion in server CPUs by 2023. So, it stands to win big from this market if it indeed manages to capture a 25% share. In all, AMD enjoys a head start over Nvidia in server CPUs, and it would have built a strong niche for itself in this market by the time the latter's Grace CPUs arrive.

AMD offers impressive growth at a much cheaper valuation

AMD and Nvidia are high-growth companies, but there's a massive difference between the valuation of the chipmakers. While AMD trades at 9.3 times sales, Nvidia is quite expensive with a price-to-sales ratio of 24. The price-to-earnings ratio also tells a similar story, with AMD's multiple of 36 much lower than Nvidia's 76.

This makes AMD an ideal bet for investors looking to buy a growth stock at a reasonable valuation, especially considering that its growth is expected to match that of Nvidia's in the coming years. Analysts expect both companies' earnings to clock a compound annual growth rate of 32% for the next five years, which makes buying AMD over Nvidia a no-brainer given the stark difference in the valuation of these two tech stocks.

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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Advanced Micro Devices, Microsoft, and Nvidia. The Motley Fool recommends Intel and Nintendo and recommends the following options: long January 2023 $57.50 calls on Intel and short January 2023 $57.50 puts on Intel. The Motley Fool has a disclosure policy.


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