As investors, we are often reminded that the best way to invest is to watch the downside first and foremost, and let the upside take care of itself. In that vein, this article highlights three reasons why Nvidia (NVDA - Get Report) makes for a far superior investment to AMD (AMD - Get Report) currently.

Revenue That Actually Translates Into Cash

AMD has a strong advantage over Nvidia, in that AMD's investment rhetoric is solely focused on an ongoing narrative of gaining market share. At any cost, that's the game for AMD. The problem, though, is that while shareholders become fanatic as they root for the underdog, once we start to scratch below the surface, AMD highlights terrible risks.

For example, over the past  five years, despite AMD's revenue growing by approximately 18% to $6.5 billion, this solid revenue growth has not translated into positive free cash flow. In fact, in 2018 AMD's cash burn stood at $129 million.

On the other hand, over the past five years, Nvidia has seen its revenue soar by 250%, while its free cash flow has fared even better, increasing four-fold.

Financial Position - Strong vs. Weak

Similarly, given that AMD continues to be a cash-burning company, it is perhaps unsurprising to see how the two balance sheets compare. On the one hand, we have Nvidia's net cash position, which prior to the recent Mellanox acquisition for $6.8 billion, stood at approximately $5 billion. In other words, Nvidia's balance sheet was not only clean but strong, too.

AMD's balance sheet, on the other hand, is a land mine. Despite the highly favorable environment the crypto bubble provided during the 2017-18 period, AMD's balance sheet was not able to build up sufficient reserves. Its financial position at the end of 2018 was a net cash neutral position, meaning that its $1.1 billion of cash and equivalents was offset by $1.1 billion of debt. Consequently, given the strong headwinds expected for H1 2019, AMD's frail balance sheet will allow AMD's executives no room for execution mishaps.

Valuation - Clear Cut Answer

Warren Buffett reminds us that poor companies bought at the correct price can often make for great investments, but that great companies at the wrong price nearly always make for poor investments.

As such, it would be disingenuous and unfair to Nvidia to claim that AMD's earnings are in any way as strong as Nvidia's. More specifically, AMD's earnings rarely have a strong cash conversion.

More often than not, AMD's earnings are mostly redeployed back into the company for capital expenditure, which equaled about 40% of its 2018 GAAP net income. On the other hand, Nvidia's earnings have a strong cash conversion, with less than 15% of its GAAP net income being needed to be redeployed back into the business.

Consequently, AMD's earnings are worth substantially less. And further compounding issues for investors, AMD's stock is being priced at nearly 80 times trailing earnings, while Nvidia, despite having a strong balance sheet, strong growth and generating large amounts of free cash flow, is only trading at 27x trailing earnings.

The Verdict

As discussed at the start, the fight for market share gains is ultimately not translating into a solid investment in AMD's case. In the battle of David versus Goliath, we would love David to come out swinging, but sadly that is simply not the case. Nvidia makes for a much better investment in all three areas looked at.

Nvidia is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells NVDA? Learn more now.

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I have no positions in any stocks mentioned.