Advanced Micro Devices stock offers better value than NVIDIA

Most investors in the technology sector have been focused on the trends and developments surrounding names in the artificial intelligence space, particularly those in the semiconductor industry that are responsible for building the infrastructure required to make these models work and out of them the data supplied can grow. The darling of this industry lies in NVIDIA Co. NASDAQ:NVDAbut there are signs that a new contender could be knocking on the door of a new massive rally.

While NVIDIA dominated the artificial intelligence and semiconductor market in 2024 and most of 2023, some might say the company has pushed too hard as valuations reach stratospheric highs. Future growth rates projected by Wall Street analysts are not high enough to possibly justify today’s valuations, let alone higher ones. Knowing this, investors could look for other names in the space to get a better risk-reward ratio.

Advanced micro devices today

AMD

Advanced micro devices

$125.06 -1.23 (-0.97%)

(As of December 26, 2024, 5:45 p.m. ET)

52 week range

$117.90

▼

$227.30

P/E ratio

112.67

Price target

$191.96

And that’s exactly where the shares of Advanced Micro Devices Inc. (NASDAQ: AMD), also known as AMD, comes into play.

Key valuation metrics compared to industry peers make it clear that AMD offers one of the better setups for a potential purchase.

Wall Street analysts agree, and even institutional investors see this as reason enough to buy the stock before the new year.

What makes AMD stock better than its competitors today?

Two things typically determine the price of a stock: interest in that stock in the broader market and earnings per share (EPS). Based on this, investors can judge whether a stock is popular or not popular in the market.

This is where price movement becomes important. There is a huge gap between shares of AMD, which are now trading at 55% of their 52-week high, and shares of NVIDIA, which are still trading at 92% of their 52-week high. Investors can assume that NVIDIA won the market’s popularity contest today.

But how about tomorrow? At this point, the fundamentals for the future start to matter, and it appears that AMD has gathered enough evidence in this area to make it a potentially better buy than NVIDIA is today. Starting with Wall Street EPS forecasts of $4.91 for the next 12 months, which suggest a net jump of 48.3% from today’s EPS of $3.31.

Compared to NVIDIA’s EPS forecasts of $4.14 per share, which would boost underlying earnings by just 41.3%, it looks like AMD has a better chance of capturing the market’s premium in this regard to take over. However, growth rates that are less than 10% apart are not sufficient reason to buy a stock; Valuations must be taken into account.

Based on forward price-to-earnings (P/E) ratios, the way markets value tomorrow’s earnings today, AMD trades at a valuation of 25.6x, compared to 34.0x NVIDIA. This significant discount makes NVIDIA seem a little more expensive, but the trend isn’t over yet.

When comparing the two based on price-to-book (P/E) ratios, NVIDIA stock trades at a massive multiple of 51.4x, while AMD stock trades at just 3.9x today. Looking at it this way, investors can see that NVIDIA’s comparable EPS growth rates don’t really justify paying that high multiple.

Wall Street wants to close the gap

With all of these differences between AMD and industry leader NVIDIA, some Wall Street analysts have become aware of a possible easy win for their careers and reputations. In particular, those at Citigroup, who issued and maintained a “buy” rating on AMD stock as of October 2024, this time with a price target of $200.

To prove these views correct, the stock would need to be up as much as 59% from today’s price, not to mention approaching its 52-week highs. As optimistic as these forecasts are, these analysts weren’t the only ones willing to make their optimism public.

State Street institutional buyers decided to increase their stakes in AMD shares by 2.3% in November 2024, bringing their position to a high of $11.5 billion today, or 4.3% of the company’s shares to give investors another optimistic benchmark to rely on.

Even the bears know not to bet against this stock as the company’s short interest has declined by 8.8% in the last month, a sign of bearish capitulation in the face of all the bullish factors in the market today.

Before you consider Advanced Micro Devices, here’s what you should listen to.

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