The semiconductor industry has been buffeted by headwinds in recent months, with most of the bad news centering on China. The ongoing political tensions, with the attached threat of tariffs and trade barriers, have hit chip makers hard, but that appears to be easing. Changes in technology are also challenging the industry, with the new 7nm chips enter the market. Finally, changes in supply lines as device makers try to balance cost, performance, and availability have taken a toll, too. Intel (INTC) in particular has taken a beating from that factor, as Apple (AAPL) has settled its legal with Qualcomm (QCOM) and regained access to its preferred modem chips and PC makers have been switching to AMD for lower cost processors.
Developing secular trends are not being kind to chipmakers, either. Semiconductor chip prices are falling in 2019, and the global chip market is expected to weigh in around $445 billion this year, down some $60 billion from 2018. The problem stems from saturation; the chip content of electronic devices has reached its peak, and designers are getting more efficient. According to the chip market research firm IC Insights, the value of the semiconductor content of electronic devices is expected to drop by 15% this year, while the overall device market grows by 4%.
This is the background to upcoming earnings reports from both Advanced Micro Devices (AMD) and Nvidia (NVDA). Both companies are important players in the US chip industry, and while both have buy-rated stocks, each presents a different set of strengths. We put them head-to-head, to find out which stock is the better buy.
Nvidia Corporation (NVDA)
Nvidia stands as the establishment figure here, as the sixth-largest US chipmaker (by 2018 total revenues) and the tenth-largest in the world. The company’s products hold strong positions in the gaming and data center industries, and Nvidia graphic chips are popular among cryptocurrency miners, as well.
Still, the company reported a steep drop in revenues and earnings last quarter. The stock suffered, falling over 31% year-over-year, and even now has only partially recovered. So, NVDA is seen as having something to prove heading into the Q2 earnings report set for Aug 15. The company is expected to report 87 cents EPS, up 29% from last quarter.
A strong quarter will justify the recent upbeat analyst reports. Writing from Piper Jaffray on July 12, Harsh Kumar says, “NVIDIA recently introduced its ray tracing GPUs, and according to the company, initial demand has been solid. Based on our survey results, we believe initial demand is also off to a good start.” He also points out that 70% of gamers surveyed by Piper Jaffray report they are maintaining or increasing spending on graphics cards. The strong demand from gamers underlies Nvidia’s confidence in releasing three new graphics cards in July. Kumar gives NVDA shares a buy rating, with a price target of $200, suggesting an 18% upside to the stock.
On July 17, Merrill Lynch’s Vivek Arya saw an even more bullish 33% upside to Nividia, giving the stock a $225 price target. He wrote, “While we continue to see … headwinds, we remain bullish on NVDA long term due to its uniquely leverageable graphics platform and exposure to some of the fastest growth markets in semis – in particular the still budding $60bn total addressable market for artificial intelligence (AI) chips/systems.”
Overall, NVDA keeps a moderate buy rating from the analyst consensus, based on 18 buys, 9 holds, and 1 sell given in the past three months. The stock’s $187 average price target represents an upside potential of 11% from the share price of $168.
Advanced Micro Devices, Inc. (AMD)
AMD will be reporting Q2 earnings on July 24. Where Nvidia has struggled to meet expectations this year, AMD shares are up almost 76% year-to-date. At the same time, the stock’s recent reviews are more mixed that NVDA’s.
Vijay Rakesh, from Mizuho Securities, gave AMD a downgrade on July 18, saying that the stock’s six-month run up in price has left it with little room for further growth. He wrote, “With the stock past our price target and at a 10-year high, we see 2H upside more limited. We would revisit at a more attractive entry point as the roadmap is still intact.” Rakesh set a $37 price target, up 12% from the previous, suggesting 13% growth potential to the share price.
So much for the bears. The bulls are more focused on AMD’s new line of chips. The company released two new desktop processors, the Ryzen 3000s, earlier this month to positive reviews, along with new third-gen Ryzen desktop CPUs. Along with all of that, were three new 7nm Navi GPUs, making July a busy month for AMD. The new chips were said to offer better combinations of productivity performance and price points versus the competition from Intel. Nomura analyst David Wong liked what he saw, and raised his price target to $37. This matches Rakesh’s target, but Wong gives the stock a buy rating. Wong sees AMD reaching 20% market share by year’s end.
Five-star financial blogger Laura Hoy takes a cautiously bullish stance on AMD, writing, “The long-term growth potential of Advanced Micro Devices is undeniable… investors should keep AMD on their radar, in case a dip in the share price creates a more attractive buying opportunity.” Like Rakesh, she believes that AMD’s recent gains have left it without much room for short-term growth, but like Wong, she expects to see further gain in the mid- to long-term.
Looking to the second fiscal quarter, AMD is expected to report revenues of $1.52 billion, or a drop of 13.36% from the year-ago quarter. This will represent an improvement, however, over Q1’s 22.8% year-over-year loss. EPS is expected at 5 cents, only half of last year’s 10 cent Q2 number. The drops are attributed to sales downturns, as detailed in the introduction above.
Overall, AMD is another moderate buy stock, having received 13 buys and 8 holds in the last three months. AMD shares sell for $32.51, so the $34.05 price target offers just a 4.7% upside potential.