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Intel (INTC 3.26%) and NVIDIA (NVDA 2.67%) built their businesses around the PC. Intel, the dominant supplier of x86 CPUs, has felt the sluggish demand for PCs. It produced a lower net income in 2015 than it did in 2010, driven by slumping PC sales and the failed attempts to break into the mobile market. NVIDIA, on the other hand, has benefited from a resilient gaming PC market. Sales of its graphics processors, particularly high-end models, have surged in recent years, driving the company's revenue to record levels.

Both have been diversifying away from PCs, with Intel putting a heavy focus on data center products and NVIDIA growing its enterprise and automotive businesses. The two companies are clashing in the accelerator market, where NVIDIA's dominant Tesla GPUs are being challenged by Intel's 72-core Knights Landing chips. Intel is aiming to increase the quantity and variety of chips it sells into the enterprise, putting NVIDIA in its crosshairs.

With the heyday of the PC long gone, Intel and NVIDIA will likely look very different 10 years from now. With that in mind, one question remains: Which stock is the better buy?

The case for Intel

Image source: Intel.

Despite a weak PC market, Intel remains a wildly profitable company. Its growth engine in recent years has been in its data center segment, where its server CPUs enjoy a near-monopoly. That may not be the case forever: Advanced Micro Devices (AMD 0.27%), International Business Machines, and ARM Holdings are all attempting to chip away at Intel's server dominance. But for the time being, Intel remains the king.

The data center segment now generates almost as much operating income as the client computing segment, which includes chips that go into PCs and mobile devices. The company's recently updated five-part strategy reflects this shift. The first priority for Intel is the cloud and the data center, with connected devices coming second.

Intel still enjoys a major advantage in the PC CPU market, as one of just two companies that sell x86 PC CPUs. AMD, which hopes to win back market share from Intel next year with its upcoming Zen CPUs, is the other. Historically, AMD has never been able to remain competitive for all that long. The last time AMD was a major force in the PC CPU market was about a decade ago.

Analysts are expecting Intel to produce $2.50 per share in adjusted earnings this year, putting the P/E ratio at about 14. The company will face many challenges over the next few years as it deals with more competition in its core markets and that could derail earnings growth. But for those who believe Intel can successfully navigate through this post-PC era, the stock trades at a fair price.

The case for NVIDIA

Image source: NVIDIA.

Shares of NVIDIA have exploded over the past year, soaring 170%. Over the past five years, the stock is up more than 360%. There have been multiple factors driving these impressive gains. The company's core PC graphics card business has been booming, with sales of its higher-end cards driving record revenue. NVIDIA's unit share of the discrete graphics card market increased from around 60% in 2014 to 80% in 2015, leaving AMD with the scraps.

Beyond PC graphics cards, NVIDIA has been growing two other businesses. In the enterprise, the company's Tesla GPUs are increasingly being used for machine learning and artificial intelligence tasks, with the largest cloud computing companies buying the cards by the thousands. In the automotive market, NVIDIA's DRIVE platforms are being adopted to both power in-vehicle displays and aid with the development of autonomous vehicles. NVIDIA's chips are already in a variety of models, including the Tesla Model S.

In all of these markets, NVIDIA will be facing plenty of competition. In the graphics card market, AMD recently launched the first of its Polaris graphics cards in an effort to win back market share from NVIDIA. In the enterprise, Intel is gunning for NVIDIA with its Knights Landing chip. And in the automotive market, there's no shortage of companies aiming to stake a claim in the self-driving car of the future.

Its stock has surged because investors expect NVIDIA to be able to grow swiftly in the coming years. But with shares now trading for 40 times trailing-12-month earnings, the company's falling short of expectations could send shares tumbling.

The verdict

While NVIDIA appears to have superior growth prospects, in part because it's so much smaller than Intel, the lofty valuation makes it difficult to recommend. For that reason, Intel looks like the better buy. A lot of things will need to go right for NVIDIA in the coming years for the stock to grow into its valuation, and I suspect that the market has gotten a little too optimistic.

Intel also has the benefit of a far superior dividend, with the stock yielding nearly 3% compared to just 0.75% for NVIDIA. Intel is facing many challenges, and its extraordinary dominance of the server CPU market may not last. But despite these issues, the stock looks more attractive than NVIDIA's.