This is "Stock Smackdown," where two similarly positioned companies will go head to head in a battle for superiority. They'll each be judged on a series of objective merits, including valuation, earnings quality, and dividend quality. We'll also take a look ahead at some more subjective measures -- Wall Street's analysts will get their say, but so will The Motley Fool's top market minds.
The winner will be the stock that racks up the most battle victories by the end of this competition. Now, let's go to ringside and meet our two combatants, NVIDIA (Nasdaq: NVDA ) and Qualcomm (Nasdaq: QCOM ) .
In this corner …
Qualcomm and NVIDIA have both staked their futures on mobile. Both now offer quad-core mobile chips, but each is banking on a different mobile OS winning the war. Qualcomm's position today owes significant thanks to Apple's (Nasdaq: AAPL ) iPhones, and if the next iPhone doubles that device's lifetime sales, it would be a massive windfall that could allow Qualcomm to separate itself from the pack. NVIDIA has secured key spots in multiple Android devices and will also have a key role in Microsoft's upcoming Surface tablet.
NVIDIA's recently bucked the slow-growth trend hindering major PC-based chipmakers Intel (Nasdaq: INTC ) and Advanced Micro Devices (NYSE: AMD ) . By spreading itself across Android and Windows 8 mobile devices, NVIDIA positions itself well for a rising counter-Apple tide -- but Qualcomm is highly competitive in devices whose names don't start with a lowercase I. It has a firmer foothold in smartphones than in tablets, but NVIDIA isn't leaving any battleground uncontested.
Valuation battle
We use many different numbers and ratios when talking about the value of a stock. The price-to-earnings ratio is the standard, so we'll check each company's current P/E and five-year historical average P/E. We'll also check the same two ratios on a price-to-free cash flow basis. Earnings can be gamed with a number of different accounting tricks, but free cash flow is harder to manipulate, making it a favored metric here at the Fool.
The difference between a stock's ratio today and its five-year average will be more important than the numbers themselves. Ratios currently lower than their averages may have more room to grow back to that middle ground.
For the tiebreaker, we'll check one less-used financial metric: the debt-to-equity ratio. A company with little or no debt is usually in better shape than one leveraged to its eyeballs.
|
Metric
|
NVIDIA
|
Qualcomm
|
| P/E |
19.0 |
18.0 |
| 5-year average P/E |
22.7 |
25.3 |
| P/FCF |
56.4 |
27.2 |
| 5-year average P/FCF |
45.6 |
21.2 |
| Debt/equity |
0.01 |
0.03 |
Source: Wolfram Alpha and YCharts. Winners in bold.
It looks like Qualcomm takes this round, with lower ratios across the board. Both companies have similar differences between their current and five-year-average ratios, but Qualcomm has a shorter distance to return to its averages.
Earnings quality battle
A company can be cheaply valued without being a good value. To balance out our valuation fight, let's look at a few key earnings statistics for each company. We'll look at each company's operating and net margins, five-year annualized rates of earnings growth, and streaks of both profitable years and improving profitability. A company with no momentum today is less likely to become a superstar later -- it has happened before, but not often.
|
Metric
|
NVIDIA
|
Qualcomm
|
| Operating margin |
13.8% |
31.8% |
| Net margin |
11.9% |
32.1% |
| 5-year annualized earnings growth |
(12.1%) |
14.7% |
| Consecutive profitable years (since 1992) |
2 |
11 |
| Consecutive years of earnings growth |
2 |
2 |
Sources: Yahoo! Finance and Wolfram Alpha. Winners in bold.
Another decisive Qualcomm victory! It's definitely ridden the mobile revolution to better margins, and its business has shown more resilience than NVIDIA's over the past decade.
Dividend battle
A growing company is great, but one that pays you back is even better. On this measure, Qualcomm wins hands-down, as it's the only one of these two companies to pay dividends. Before we move on, let's take a quick look at some of Qualcomm's key dividend metrics, to make sure it's in no danger of disappearing.
|
Metric
|
Qualcomm
|
| Dividend yield |
1.4% |
| Payout ratio |
37.4% |
| Free cash flow payout ratio |
29.3% |
| 5-year annualized dividend growth |
9.4% |
| Years of uninterrupted dividends |
9 |
Sources: Morningstar and Dividata.
Qualcomm's dividend is quite sustainable. Its growth in recent years hasn't brought either payout ratio close to any danger zone.
Battle for the future
How do the world's most engaged market participants view these companies? Let's see what Wall Street's analysts expect, and what our Motley Fool CAPS community thinks.
|
Metric
|
NVIDIA
|
Qualcomm
|
| "Buy" recs (% of total ratings) |
43.6% |
86.7% |
| Forward growth rate (2013) |
20% |
12.4% |
| CAPS sentiment (% outperform) |
95.8% |
94.3% |
Sources: Yahoo! Finance, Motley Fool CAPS.
NVIDIA ekes out a single victory to Qualcomm's three, but it's not enough in the end to take the crown as the best mobile-chip maker on the market today. One of the best ways to stay ahead of these companies is to watch their key hardware partners, which is why The Motley Fool's developed a new premium stock-specific research service, with analysts covering both Apple and Microsoft. For an inside angle on chipmaking competition, we also offer research services on Intel. You can get a year's worth of regular and detailed analysis on each company for less than the cost of a typical trade. To get your research started, click on the company name of your choice: Apple, Microsoft, or Intel.
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