Global chip shortages have helped drive sales of semiconductors and related components across the roof, with stock prices of companies that design and sell chips also skyrocketed. AMD 09.30 NASDAQ: AMD and NVIDIA 09.30 NASDAQ: NVDA are two of the hottest names in this space, and the shares of the companies have increased by 78% and 174% since the beginning of 2020.
These two companies are expected to continue to grow at incredible speeds for the rest of 2021. AMD and NVIDIA both deserve attention in your portfolio if you plan to buy and hold for at least a few years ̵
Universal chip starting waves
AMD has been back for years with a rapidly improving range of chips targeting the laptop and PC markets, as well as data center hardware and cloud computing services built on them. His battle was mostly with Chipzilla, Intel 09.30 NASDAQ: INTCwhich made more than half of the nearly $ 78 billion in 12-month sales of computers and related hardware. AMD is small compared to sales of only $ 11.4 billion over the same period. But a 70% jump in revenue over the past year (compared to Intel’s 8% revenue growth) means AMD is grabbing a very new market share at the expense of its larger partner.
AMD’s plan of attack centered around a suite of affordable processors (CPUs), GPUs (GPUs), and other processors for personal computers and enterprise data centers. But it adds a new type of chip to its arsenal, FPGAs (field programmable port arrays) used in everything from data centers to networks to industrial equipment. AMD enters this space with the acquisition of an FPGA leader Xilinx, and will test the meaning of Intel’s FPGA business, which Intel acquired through two smaller peers: Altera and Omnitek.
AMD expects its revenue to increase by 50% this year, but the real story here is the expanding profit margin. Historically, AMD lags behind many of its counterparts in terms of profitability. But as it increases its market share and chip technology, it is making serious progress. The operating margin was 16% in the last 12 months, compared to less than 10% in early 2020 just a year and a half ago. The addition of Xilinx to the mix should help AMD make further advances in this area.
Given fast-growing sales and even faster-growing results, AMD is reasonably priced at 38 times the expected earnings per share for the full year. Semiconductors and technology components follow a cyclical business model (sales tides depending on customer demand, which tends to revolve around the launch of new products and new technological opportunities), so don’t expect sales to continue their terrible double-digit percentage forever . But given their current momentum, AMD seems like a purchase to me, as the shortage of chips keeps sales rising higher.
Leader in AI and high-tech progress
NVIDIA started designing GPUs to enable high-end graphics for high-end video games, but also gave up Intel’s leadership role, especially in data centers. Intel’s quarterly revenue for the “data center group” was almost as much as NVIDIA’s total revenue in the first quarter of 2021. But like AMD, NVIDIA is stealing market share. His income increased by 47% over the next 12 months.
The company is fast becoming more than a leader in the semiconductor industry – it is also a leading high-tech research and development company. In fact, R&D spending is 22.5% of sales in the last year, which is one of the highest percentages among technology giants. NVIDIA strives to lead the way in artificial intelligence, and its GPUs are suitable for the task, in data centers, but also in personal devices. And despite its high costs, NVIDIA’s operating margin was a very strong 29% over the last one-year period.
AI requires crushing huge amounts of data and it is an intensive computational process that expands the boundaries of processors. The GPU, in contrast, can speed up the process many times over, consuming less power all the time than older CPU designs. In this way, many data center operators add NVIDIA GPUs to the mix or directly replace old hardware with new NVIDIA systems. Combined with its gaming business, it boosted NVIDIA’s sales by 84% in the first quarter. The company did not provide guidance for the full year, but said it expects second-quarter revenue to increase by another 63% year-on-year in the second quarter.
NVIDIA trades for 41 times the expected earnings per share throughout the year. It’s a steep price, but NVIDIA is helping to build a more efficient world with AI, applying it to every area, from car safety and autonomy to healthcare research to cloud computing. For those looking at long-term potential, NVIDIA is a great stock that it can own as it goes from a GPU specialist to a full-fledged technology platform for the future of computers.
What is the better purchase?
AMD is the cheaper shareholder right now, especially given its rapidly rising bottom, as years of investment finally begin to pay off. AMD is certainly worth buying in my book, as it has reaped the benefits of the global chip shortage.
However, I think NVIDIA is a better long-term investment. It’s a semiconductor business all the time, but it’s expanding beyond the design of technology components and helping its customers create new applications using AI. With a hand in all areas of state-of-the-art technology, NVIDIA has many years of high growth potential ahead of it, despite the cyclical nature of its semiconductor-based business.
This article presents the opinion of the writer, who may disagree with the “official” position of the recommendation of the first-class consulting service of Motley Fool. We are colorful! Challenging an investment thesis – even one of our own – helps all of us to think critically about investing and make decisions that help us become smarter, happier and richer.