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Nvidia vs. AMD: The Future of The GPU Space

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Nvidia (NVDA - Free Report) and Advanced Micro Devices (AMD - Free Report) are fighting head to head for market share in the GPU space. The GPU semiconductor category has become a duopoly in which Nvidia and AMD control the market. This duopoly has driven innovation as both firms are pushed to develop the highest performing GPU.

Any PC gamer will give you their two cents on which GPU performs best and which will provide the user with the best value for their needs. I am going to dive deeper into GPU functionality and the ‘investability’ of NVDA and AMD.

What is a GPU?

A GPU stands for a graphics processing unit which most people associate with the display function of a computer, but its capabilities have gone beyond that.

GPUs and CPU have a lot in common both being silicon-based microprocessors, with some crucial differences. CPUs are better at handling a few complex tasks while GPUs exceed at handling thousands or even millions of simple tasks simultaneously. Rendering images requires simple computing power but needs to be done on a large scale quickly, which make GPUs the best option.

CPUs could technically run their own graphics, but it would not only slow down the interface of the CPU it would also render a lower quality image. CPUs and GPUs typically work together in a computer for it to work efficiently and effectively. PC gamers are always waiting for the newest and best performing GPU so that 3-dimensional gameplay is as seamless as possible.  

Modern GPUs have become powerful enough to be used for tasks beyond image rendering, such as cryptocurrency mining. Originally the mining was done with a CPU, but they found that using a GPU to perform the repetitive parallel tasks required for data mining was much more lucrative. GPUs have also begun being used in AI and machine learning for fast and efficient learning.   

I discuss CPUs along with AMD and Intel’s (INTC - Free Report) battle for the space in my article The CPU Chip Battle Rages On: AMD vs INTC.

AMD vs. Nvidia

AMD and Nvidia have been contending on the gaming and personal computer GPU front for years, and now the battle is being taken to datacenters with their advance GPUs providing improvements in deep learning and AI.

Both of these firms GPU segments are still driven primarily by the gaming community and their need to update their GPU to remain competitive with their cohorts. This means that these firms are continuously being forced to innovate and create the next best GPU that serious gamers can’t pass up.

Nvidia has been controlling the GPU market for some time now, though they lost market share this past quarter. Below you can see GPU market share for discrete PCs trending over the past 3 years.

AMD has historically competed in this space with their lower-priced value proposition while Nvidia has been able to outpace AMD in performance, but with a much heftier price tag.

Datacenter GPUs have been driving a more significant portion of these firms’ revenues with innovations, progress in AI, and cloud computing becoming a norm. I am confident that this segment will continue to grow.

Nvidia had been able to illustrate strong double-digit year-over-year growth since 2016 up until the last two quarters, which illustrated a deep decline in revenues and profits. AMD has been inconsistent with its top-line annual growth figures illustrating negative growth for the past 2 quarters as well.

AMD has far outperformed NVDA so far in 2019 with AMD’s growth expectations for the next two year being higher than NVDA. Topline innovation drivers and margin expansion were the key catalysts.

Both of these stocks are very cyclical because of the nature of the semiconductor business. There are periods of excessive demand then it slows down when that demand is met and new innovations aren’t a necessity. These stocks also hold quite a bit of market risk with betas above 2, meaning that in a bear market these stocks will underperform and in a bull market they will overperform.

Nvidia is a pure-play GPU firm which makes them a bit riskier in my mind because of the lack of diversification. AMD produces a more diverse portfolio of products, though GPUs and CPUs are driving the majority of its profits.

Take Away

The GPU market is primarily driven by PC gamers, which makes this segment extra sensitive to the economy, considering this would be identified as a consumer-discretionary good. Gamers will only update to the latest tech when they have the money in their pocket.

There is a massive amount of room to grow with these chips being used for more than just image rendering. As these chips further develop data centers and deep learning will have an increasing need for them.

Nvidia is the GPU market share leader with the highest performing products, but AMD is growing fast and not just on the GPU front. AMD has been able to take a considerable amount of CPU market share from Intel (INTC - Free Report) in recent years. The excessive size of AMD’s share price appreciation gives me concern about a potentially large pullback in the near future, though this is not a sound reason not to invest.

Nvidia is expected to report Q2 earnings on August 15th, so look to see if the firm can reverse their decline and turn this fiscal year around.


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