Forget AMD: Nvidia is still king, according to one Wall Street analyst. What does this mean for investors?

no doubt nvidia (NVDA 6.76%) There’s a good reason why it’s the darling of technology investing right now. (Despite the recent decline, the stock is up 145% so far in 2024.) The company has solidified its position as the top chip supplier for artificial intelligence (AI), with about 80% of the market. You can be sure that every other semiconductor company is trying hard to topple the throne.

advanced micro devices (AMD) It certainly is. Nvidia’s longtime rival is pouring money into developing chips that can compete with its rival’s latest products. “AI is our top priority,” AMD CEO Lisa Su said recently while unveiling the company’s latest chips.

If AMD can rise to the top of the AI ​​chip space, investors could experience the gains that Nvidia investors have enjoyed over the past few years. But if it does, it’s a big deal.

Morgan Stanley Analyst Joseph Moore is among those who aren’t sure that will happen. He recently downgraded his rating on AMD, saying he believes “the upside potential for AI from here is limited.” ouch.

This analyst thinks expectations for AMD may be too high, but take it with a grain of salt.

Moore’s argument isn’t that AMD can’t do anything. He thinks the company will continue to find success in video game cards and will also find success in AI, but not enough to catch up to Nvidia.

This analyst’s main concern is that market expectations are too high. The market is pricing AMD at a huge premium, expecting the company to significantly expand its AI chip business. The stock trades at a trailing price-to-earnings ratio of about 230. If we use our estimates and convert to a forward P/E, the valuation becomes more similar to Nvdia’s around 47.

But don’t forget that analysts aren’t always right. In fact, they have a lot wrong. For every bear there’s a bull, and one of them has to be wrong eventually. Yes? It’s best to look at the claims themselves and form your own opinion.

Also, keep in mind that analysts are adjusting their ratings and price targets fairly frequently and are typically focused on shorter investment horizons than individual investors would consider. Even if AMD fails to meet Wall Street’s expectations next quarter, its long-term prospects could still be attractive.

AMD still has a lot to prove and will have a hard time taking down Nvidia.

I would like to agree with Moore’s main point that Nvidia will remain a leader in AI for the foreseeable future.

The difficulties for AMD in replicating what Nvidia does are enormous. Do you remember the 2024 AI chip sales forecast? 4 billion dollars. Nvidia posted sales of approximately $34 billion last year. That’s a lot of ground to cover.

If AMD wants to compete, it will have to offer products that are at least comparable to Nvidia, but with such a big gap in research and development (R&D), it’s an uphill battle. Nvidia spent $2.7 billion on R&D last quarter, compared to AMD’s $1.5 billion.

Already spending nearly 2:1, AMD has little room to increase its budget like Nvidia. Take a look at this chart showing the difference in free cash flow (FCF) between the two companies. FCF is a company’s earnings minus its operating expenses and capital expenditures.

AMD Free Cash Flow data from YCharts

Nvidia could shake up AMD by spending nearly $40 billion on R&D if it wanted to. That’s a pretty powerful position.

That doesn’t mean I think AMD is a poor investment. Quite a contrast. The AI ​​market has the potential to grow to the point where it is not a zero-sum game. Both AMD and Nvidia can succeed. But I think Nvidia is a better long-term investment.

It has sufficient resources to defend its pole position. And I think, given the vision that Nvidia’s leadership has already shown, Nvidia will use these ample resources not only to defend itself, but to grow and expand its business in ways we can’t yet anticipate.