I’ve been guilty over the last several years of creating an us versus them situation regarding Advance Micro Devices (NASDAQ:AMD) and Nvidia (NASDAQ:NVDA). While I’m partial to the latter, owning AMD stock is not wrong. Not by a long shot.
InvestorPlace contributor Dana Blankenhorn recently discussed why he still owns AMD. He pointed out that Nvidia might be the leader in graphics processing units (GPUs), but AMD has done an excellent job accelerating its efforts in artificial intelligence (AI) while also taking market share in central processing units (CPUs).
My colleague has long positions in both AMD and NVDA. He’s proof you can and SHOULD own both stocks if you can swing it. Here’s why.
AI Is Rapidly Expanding
There is a reason the Magnificent Seven has delivered most of the S&P 500’s performance in 2023. It has everything to do with AI. These seven stocks account for 29% of the index’s total market capitalization and 29% of its performance, while the other 493 stocks account for the rest. All of them are knee-deep in machine learning.
I know my colleague owns five of the Mag 7. I’m less confident whether he owns Apple (NASDAQ:AAPL) and Tesla (NASDAQ:TSLA). However, what’s important is that he’s positioned himself to benefit from the rise in AI.
Now, given the demise of cannabis stocks over the past three years, I’m always suspicious of an overly focused portfolio. However, I don’t think there’s any question AI is a much different kettle of fish than cannabis. In 10 years, AI will undoubtedly be a big part of our lives. You can’t say the same about cannabis. That’s the difference.
As a portfolio strategy, I don’t see an issue with Blankenhorn’s move. There are plenty of investors just like him. The late Charlie Munger used to say, “It’s not that easy to have a vast plethora of good opportunities that are easily identified. And if you’ve only got three, I’d rather be in my best ideas instead of my worst,” CNBC reported.
Makes sense to me.
Why Own Both? Part 1
Nvidia is, hands down, the leader in AI at the moment. The company’s move to democratize AI through the launch of AI Workbench is one of many brilliant moves by CEO Jensen Huang to bring AI to the masses. It’s not enough to produce superfast chips like the H100; you’ve got to get businesses involved in actively using and benefiting from AI. Nvidia’s doing that.
However, there is no right way to grow AI.
AMD recently hired one-time Cray (supercomputing) Chief Technology Officer Steve Scott. He’ll work with the company and CEO Lisa Su to develop high-level AI and supercomputing at AMD. That work is bound to create some exciting products to rival Nvidia AI down the road.
In the meantime, as my colleague said, it continues to capture more of the CPU market at a time when PC use has returned to growth. Owning both stocks lets you cover more ground in technology’s secular trends.
Why Own Both? Part 2
This last point is one of owning non-correlating assets. Over the past few years, I’ve noticed when NVDA stock goes on a tear, AMD lags behind. Conversely, as is the case right now, when AMD goes on a run, NVDA’s performance seems to slow.
In May 2017, I suggested that NVDA had a much better chance to hit $200 by the year’s end than AMD had of hitting $16. At the time, Nvidia was trading at $142 — it split 4-for-1 in July 2021 — finishing the year at $194, just shy of $200. AMD stock in May 2017 was around $11.40. It closed the year around $10.30.
However, in 2018, the roles were reversed, with AMD gaining 71% on the year and NVDA losing 33% of its value. Over the next five years, the two companies took turns delivering exceptional performance for their shareholders. Most of the time, just one of the two moved higher.
That is why owning both stocks makes sense. More often than not, their returns are relatively uncorrelated.
On the date of publication, Will Ashworth did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
