AMD's Record Quarter Can't Save It from Nvidia's Sizzling Growth

Advanced Micro Devices (AMD) posted its best quarter in history, but despite this impressive performance, the stock price dropped. This reaction suggests more about the market's perception of AMD's value rather than any issue with the company itself.

The author initially downgraded AMD to a hold rating in June when it was trading at around 73 times forward earnings. Since then, the multiple has compressed without affecting shareholders' returns. In the latest quarter, free cash flow converted into revenue made up only 14%, which is below even the author's conservative estimate.

Meanwhile, Nvidia outpaced AMD in terms of growth last quarter, with a significant advantage due to its much larger revenue base. Nvidia was able to convert roughly 60% of its revenue into cash, and it trades at a 30% discount compared to AMD's forward multiple.

The author reiterates their hold rating on AMD but raises their buy recommendation for Nvidia, increasing the target price from $208 to $269 after acknowledging that previous assumptions were too conservative.