Nvidia (NVDA) stock is driven primarily by its high-profit margins, whereas Advanced Micro Devices (AMD) stock is driven by its strong revenue growth. AMD stock rose 14% after it reported better-than-expected fiscal Q2 2018 revenue and stated that it might gain server market share from Intel (INTC). Intel stock fell 9.4% after its fiscal Q2 2018 earnings release showed lower-than-expected growth in its data center business.
Let’s see whether these three stocks are fairly valued based on their fundamentals.
Forward price ratios
A stock’s price ratio is based on analysts’ earnings estimates for the next four quarters. The forward PS (price-to-sales) ratio tells us the amount investors are willing to pay per dollar of a company’s sales. On August 1, Nvidia’s forward PS ratio of 11.3x was higher than AMD’s and INTC’s ratios of 1.9x and 3.8x, respectively.
A forward PE ratio tells us the amount investors are willing to pay per dollar of a company’s EPS. On August 1, Nvidia’s forward PE ratio of 34.0x was lower than AMD’s ratio of 40.2x but higher than INTC’s of 11.7x.
What do price ratios tell investors?
The above ratios indicate that Nvidia stock has not only priced in sales and earnings growth for next year but also for expected future earnings from emerging markets such as autonomous vehicles and artificial intelligence.
According to price ratios, Intel is a cheap, attractive stock since it doesn’t price in its earnings potential. While technical analysis shows a weakness in Intel stock in the short term, price ratios show strength in the long term, which could make it attractive for some investors.
AMD is an expensive stock given its PE ratio but cheap given its PS ratio. Since AMD stock is largely driven by sales growth, some long-term investors believe it’s an attractive investment.
Next, we will see what efficiency ratios say about these three stocks.