Should NVIDIA Be Scared with AMD’s Uprise?

NVDA stockNVIDIA Stock and AMD Stock: The Backstory

It’s funny how quickly the world changes. Not too long ago, investors wouldn’t touch Advanced Micro Devices, Inc. (NASDAQ:AMD) with a 10-foot pole. Similarly, NVIDIA Corporation (NASDAQ:NVDA) was an obscure microchip maker that no one cared about. Now the AMD stock price and NVIDIA stock price are the biggest stories on the market.

How did this happen?

Well, I suppose it starts with gaming. Both AMD and NVIDIA manufactured high-end GPUs for video game enthusiasts. It was a lucrative corner of the market, but too small to tempt 800-pound sharks like Intel Corporation (NASDAQ:INTC).

That turns out to have been a terrible mistake on Intel’s part.

Years later, these high-end GPUs became a key component in emerging technology trends like driverless cars, cryptocurrencies, and the Internet of Things (IoT). Basically, all things that require artificial intelligence (AI) software. It turns out that GPUs are the best hardware for AI.

I doubt that AMD and NVIDIA planned or predicted this success, regardless of what they might say today. But that doesn’t change the fact that it happened.

Sheer luck or not, the niche market that NVIDIA and AMD cultivated has blossomed into the back-end of a technological revolution.

Even for something as dull as data centers, it turns out that high end GPUs—combined with sophisticated algorithms—can improve efficiency. Who knew?

So far, these emerging technologies have benefited AMD stock and NVIDIA stock almost equally (NVDA stock performed slightly better but, then again, it is the younger stock). However, we know that even a tenuous peace cannot last.

NVDA_AMD stock chart

Chart Courtesy of StockCharts.com

It’s a matter of time before NVIDIA or AMD get down in the trenches. Businesses don’t want peace treaties; they want total domination. Peter Thiel put it best when he wrote that, “Monopoly is the condition of every successful business.” (Source: “Zero to One,” ZerotoOneBook, last accessed June 13, 2017.)

Consumers may love choice, but companies love monopolies. So we need to ask ourselves, which company is poised to emerge the victor: AMD or NVIDIA?

It Depends on Which High-End GPU Is Better

NVIDIA has traditionally dominated the upper strata of high-end GPUs, while AMD manufactured the more affordable options. Those days are long gone.

According to data from Jon Peddie Research (JPR), AMD spent 2016 extending its market share of discrete GPUs from 23.2% to 29.5%. This still leaves NVIDIA with a vast majority of the discrete GPU market, but the important point is that one is shrinking while the other is growing. (Source: “Add-in board market decreased in Q1’17 from last quarter, with Nvidia gaining market share,” Jon Peddie Research, last accessed June 13, 2017.)

I gather that’s what AMD executives would say, if I cared to call them. Their ploy is so transparent I don’t even feel the need to get in touch.

It’s obvious that AMD’s new chip, the “RX Vega GPU,” is a shot across the bow of NVDA stock. We’re coming for you, is what it says. Indeed, all accounts suggest that the Vega will be powerful and competitively priced against NVIDIA’s line of high-end GPUs.

We can expect all of them to end up in the range of $700.00 to $1,200 apiece.

Of course, NVIDIA is still carrying an ace up its sleeve: The “Volta” GPU.

It is slimmer and potentially more power-conscious than AMD’s Vega, but it is only scheduled for release by the end of the year. This gives AMD at least two quarters of catch-up time.

That, in combination with AMD’s patent licensing deal in China, could be enough for the stock to repeat last year’s performance. I am bullish on AMD stock overall, but I don’t think it is a threat to NVDA stock. Here’s why.

Why NVIDIA Stock Is Safe

Let’s take this point-by-point.

  1. NVIDIA’s market cap is almost eight times bigger than AMD’s.
  2. NVIDIA’s 2016 revenues more than doubled AMD’s.
  3. NVIDIA made $507.0 million in profit last year. AMD lost $73.0 million.
  4. NVIDIA outspent AMD in R&D. ($1.4 billion vs. $1.0 billion)
  5. NVIDIA’s media relations department can barely finish a sentence without including the word “AI,” whereas AMD acts like it’s never heard of it.

Even if all these weren’t true, I would still vote for NVIDIA as the eventual winner. Why? Because it has a two-to-one market share advantage. That is the silver bullet, without question.

Both research and experience have taught me that market leaders double the share of the No. 2 player. It is an age-old business rule that sticks around because it happens to be true.

I have every reason to expect the high-end GPU market to conform to this pattern. As such, both AMD stock and NVDA stock are expected to rise in tandem with the overall ascension of AI products, though it is reasonable to expect continued outperformance from NVIDIA.

There is also a strong likelihood that smaller firms will compete for third place, creating an extra opportunity for traders to make money in this exciting new industry.