Let the Microchips Fall Where They May
Marie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Wondering where to put your money in the upcoming console war between the Sony (NYSE: SNE) PlayStation 4 and Microsoft’s (NASDAQ: MSFT) new Xbox console? Sony's stock price has been on a slow decline since 2011 and Microsoft has, for the most part, held steady since 2009 in a kind of soft rut. With the Wii U already on the market and not selling well, it looks like Nintendo (NASDAQOTH: NTDOY) is already out of the real race. Maybe the best idea is to invest a little further down the food chain, and look at who is manufacturing the microchips that will be powering the new consoles.
When Sony developed the PlayStation 3, they worked with Nvidia (NASDAQ: NVDA) to develop the RSX “Reality Synthesizer” graphics processing unit, or GPU. Sony oversaw manufacturing, while Nvidia provided support to the manufacturers.
Nvidia also worked with Microsoft in the development of a GPU for the original Xbox, but when it came time to develop the Xbox 360, Microsoft chose to license a design by ATI and handle manufacturing itself. In 2006, AMD (NYSE: AMD), Nvidia’s chief rival, acquired ATI.
So where does that leave us today? With rumors circulating that Sony will be going with AMD for the GPU for the PlayStation 4. Similar rumors are circulating that Microsoft will also include AMD GPUs in the next Xbox. Nintendo used AMD technology in the Wii U, and while the unit isn’t selling as well as expected, no one is faulting the processors. So if it’s true that the new Xbox and the PlayStation 4 will also use AMD GPUs, then, for the first time, graphics superiority will be taken out of the equation for consumers trying to decide between the three consoles. Assuming, however, that the rumor mill may be shockingly inaccurate, let’s look at both AMD and Nvidia, because it really would be shocking if one or both of them weren’t providing processors for the new consoles.
With a market cap of $1.99 billion and a five year stock chart that looks disturbingly like a roller coaster ride, AMD doesn’t look like a good bet long term. But with its current low price, it might be worth a short term investment aimed at raking in some quick cash and then letting it go. Of course, that will only happen if the console rumors are true.
Nvidia, on the other hand, has a much more stable stock history, especially over the last two years. With a market cap of $7.89 billion, an 11.57% return on average assets and a 15.86% return on average equity in 2012, Nvidia is the larger and stronger of the two companies. Nvidia also had a net profit margin of 14.53% in 2012. By comparison, AMD’s net profit margin for 2012 was -21.82%, their return on average assets is -26.42%, and their return on average equity is -111.18%. That sets my risk-averse teeth on edge.
So why are the rumors circulating that AMD will be the winner of this round of chips wars? In a word, technology. As of this moment, AMD has the best GPU chip set on the market. I applaud their engineering, but their business management makes me nervous. That low price is tempting, but I wouldn’t buy with the intention of holding forever.
Postjade has no position in any stocks mentioned. The Motley Fool recommends NVIDIA. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!