Better Buy: Sierra Wireless, Inc. vs. NVIDIA

In comparing the recent performance of NVIDIA (NVDA 0.94%) and Sierra Wireless (SWIR), graphics semiconductor supplier NVIDIA wins in a first-round knockout.

Looking at the two today, NVIDIA's share-price rally changes the math behind its investment thesis, while Sierra Wireless remains a Fool favorite in its own right. 

SWIR data by YCharts

So let's run NVIDIA and Sierra Wireless through a three-part analysis to determine which stock looks like the better buy today.

Sierra Wireless vs. NVIDIA: Financial fortitude

The difference in the size of their operations jumps out in looking at NVIDIA's and Sierra Wireless' fiscal standings:

Data sources: NVIDIA and Sierra Wireless investor relations, Yahoo! Finance. 

Sierra Wireless and NVIDIA are both well managed in terms of their ability to meet their future obligations. Both companies maintain roughly a 2-to-1 ratio of cash to debt on their balance sheet, and they both churn out a healthy amount of cash. NVIDIA beats Sierra Wireless in terms of its near-term liquidity, but both companies' quick ratios are acceptable. Because of its scale, though -- operating in the billions of dollars versus the millions is much harder to achieve -- NVIDIA earns itself a slight win in this analysis of financial strength.

Winner: NVIDIA.

Sierra Wireless vs. NVIDIA: Competitive analysis

The investment thesis for NVIDIA and Sierra Wireless relies on seeing each company profit from coming generational shifts in the tech industry, though in different ways. Though NVIDIA generates the bulk of its revenue from selling graphics processors (GPUs) to high-end PC gaming enthusiasts, the investment community is far more excited about the potential for NVIDIA's GPUs to serve as a foundational component for futuristic markets including self-driving cars, artificial-intelligence software, and more. Both are technologies that many observers believe will eventually be adopted or deployed on a global scale, and NVIDIA's technical leadership in GPUs makes it a strong contender to become a prominent supplier across these industries.

As just one example of the lofty expectations facing it, NVIDIA is anticipated to grow its earnings per share at a 28.5% average annual rate over the next five years, at which point industries such as autonomous vehicles are expected to begin seeing mainstream adoption. As the best-of-breed company in the graphics chip space, NVIDIA has abundant long-term growth potential. 

As for Sierra, the tiny chipmaker also offers considerable growth potential as a mass-market supplier for networked devices, a long-term trend often called the Internet of Things (IoT). There's the potential for as many as 50 billion connected devices, and Sierra is still in the early stages of tapping into this trend. Its full-year revenue hovers around $610 million, and it's expected to grow sales only 1% this year and 7% in 2018.

Sierra has a sensible strategy in place to capture as large of a piece of the IoT market as it can. In the past several years, it's made an effort to move farther up the networked-chip value chain by creating cloud-based software offerings that allow connected devices to more effectively communicate with one another. This should benefit Sierra by creating a second, higher-margin revenue stream beyond chip sales. It should also help retain customers in Sierra's software ecosystem.

Both Sierra Wireless and NVIDIA offer impressive long-term growth potential. Since NVIDIA's technological leadership is more clearly defined right now, though, the GPU specialist ekes out an edge in terms of its competitive advantages.

Winner: NVIDIA.

Image source: Getty Images.

Sierra Wireless vs. NVIDIA: Valuation analysis

Valuing high-growth stocks is an inexact science at best, but here's a snapshot of three of the most commonly used valuation metrics for each company:

Data source: Yahoo! Finance.

Sierra Wireless is cheaper at a superficial level, but don't consider share-price valuations in a vacuum. What matters is how a company's valuation compares with its business performance. And no matter how you look at it, NVIDIA is widely expected to grow much faster than Sierra Wireless over the next several years. As mentioned, NVIDIA's expected five-year earnings-per-share compound annual growth rate is 28%, versus a mere 4% for Sierra Wireless. A difference that pronounced means NVIDIA deserves to trade at a premium to Sierra. But since neither company seems like an observable steal compared with its medium-term growth trajectory or to each other, let's call this section a tie.

Winner: Tie.

And the winner is... NVIDIA

Though they each enjoy interesting growth stories, several factors tip this decision in NVIDIA's favor. First, NVIDIA's far larger revenue and profit bases give it a financial stability that Sierra Wireless lacks. In fact, Sierra's decision to make modest growth investments caused the company to lose money on a GAAP accounting basis in its most recent quarter. Second, NVIDIA's technological leadership already exists, whereas Sierra Wireless is still gaining traction in its cloud-based software business. Taking these factors into consideration, NVIDIA bests Sierra Wireless as the better buy today.