Semiconductor stocks are hot. The era of artificial intelligence, machine learning, cloud computing, high-performance gaming, and autonomous driving is here. Someone needs to make the chips that power all those new technologies. Enter semiconductor industry darlings Advanced Micro Devices, Inc. (NASDAQ:AMD) and NVIDIA Corporation (NASDAQ:NVDA). Both stocks have just taken off over the past year and a half. Since the start of 2016, AMD stock is up almost 400% while NVDA stock is up almost 500%.
While its easy to throw the two stocks into the same bucket and say “buy both” or “sell both,” that cursory analysis ignores a fundamental reality in this industry: NVDA is kicking AMD’s butt where it matters most.
That is why I say buy NVDA, sell AMD.
AMD Is Playing Catch-Up
Its no secret that the semiconductor hype machine is centered around cloud computing and artificial intelligence.
Its also no secret that NVDA dominates both areas, while AMD is desperately playing catch-up.
Hyperscale data centers continue to grow in size as data migrates to the cloud. Meanwhile, the rapid emergence of the Internet-of-Things (IoT) means that huge loads of data are coming online like never before. That data is also going to the cloud.
Right now, NVDA essentially controls this entire market. AMD basically has zero percent market share. New server chips for AMD are geared towards the high-end computing market. These new server chips could lead to AMD capturing a fragment of this hyper-growth market, but the reality is that NVDA is the bread-winner here.
That is a critical divergence between these two companies. NVDA is the king of the cloud computing space. AMD is desperately vying for a seat at the table.
The same is pretty much true on the AI side of things. NVDA is the all-things-AI company. If you are looking to venture into AI technology, you use NVDA chips. Its that simple.
General Electric Company (NYSE:GE) is leveraging NVDA technology to develop robotic drones to inspect equipment. Wal-Mart Stores Inc (NYSE:WMT) is using NVDA chips to build out its own cloud-based AI network. Baidu Inc (ADR) (NASDAQ:BIDU) is using NVDA chips to power its autonomous driving, deep learning, and smart home efforts. Tesla Inc (NASDAQ:TSLA), Volkswagen AG (ADR) (OTCMKTS:VLKAY), and Toyota Motor Corp (ADR) (NYSE:TM) also count themselves as buyers of NVDA’s chips for their own AI efforts.
What about AMD? Not much to mention. Once again, we see that NVDA is the king of the AI space. And once again, AMD is desperately vying for a seat at the table.
Bottom Line on AMD Stock
NVDA is kicking AMD’s butt in the high-growth cloud computing and AI markets. But NVDA stock trades at 47.5-times next year’s earnings estimate while AMD stock trades at 42-times next year’s earnings estimate.
Those are pretty comparable valuations, considering one company is really crushing the other company where it maters.
Why is that? There is a lot of hope for the AMD’s EPYC CPUs, but the stock is priced as if robust EPYC growth were a sure thing.
It isn’t. In fact, its far from a sure thing because NVDA already has such a strong foothold in this market. The most likely outcome here is that AMD’s new chips under-perform current market expectations while NVDA remains the go-to chip supplier for all things cloud and AI related.
Consequently, I say buy NVDA, sell AMD stockAfter all, there is a reason NVDA stock is up more than 75% since May, while AMD stock is down 4%.
Its not because the market is stupid. Its because the writing is on the wall that NVDA is starting to leave AMD in the dust.
As of this writing, Luke Lango was long NVDA.
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