Key insights
- The article analyzes AMD and Nvidia, focusing on their forward price-to-earnings (P/E) ratios as a key metric for future investment potential. Despite AMD's recent strong stock performance, Nvidia appears to be the better buy based on valuation, trading at a significantly lower forward P/E ratio (24x) compared to AMD (70x). This suggests Nvidia offers better growth prospects relative to its valuation, making it a more attractive investment going forward.
AMD (AMD +1.07%) and Nvidia (NVDA 0.56%) are two stocks that are often compared. It makes sense, as these two are the top dogs in the graphics processing unit (GPU) space. GPUs have been the primary computing chip utilized for artificial intelligence (AI) training and computing up to this point, and they'll likely maintain a dominant hold on this industry because of their ability to handle a variety of workloads and data sets.
Nvidia has been the biggest winner and has become the world's largest company by market cap. However, over the past year, AMD has been the better investment. Its stock has risen over 350%, while Nvidia's is up nearly 60%. Nvidia investors are happy with a strong return like that, but they'd be lying if they told you they weren't a little jealous of AMD's return.
Nobody can go back in time and reverse their investment decision; all that remains is to look at which is the better investment going forward. I believe there's a clear metric that informs me which is the better buy, and it's not even close.
When comparing stocks, I look at two key factors: growth and valuation. I want to ensure that a highly valued company has the growth to back it up. On the flip side, if I can find a stock that doesn't have a premium valuation, yet is rapidly growing, then it's a sign that the stock could be worth buying.
The primary valuation metric I use when comparing stocks like AMD and Nvidia is the forward price-to-earnings ratio, as it includes future growth expectations, which are vital considering the massive amount of growth both are experiencing. From this standpoint, Nvidia clearly looks like a better buy.
With AMD trading at 70 times earnings and Nvidia trading at 24, AMD's stock is essentially 3 times as expensive as Nvidia's. That's a huge premium to pay, and that mismatch extends into the next fiscal year as well.
So, even after AMD's 2027 earnings are accounted for, it's still far more expensive than Nvidia. Now, if AMD has the growth to back that up, then I'd say the premium could be worth it. But Nvidia is outgrowing it, and it's not particularly close.
This makes me far more bullish on Nvidia's future, and I believe it's the better stock to buy right now.