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Better Buy: NVIDIA Corporation vs. NXP Semiconductors, NV

By Anders Bylund – Sep 16, 2016 at 8:07AM

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This race isn't even close, especially if you care about valuation risks.

Image source: Getty Images.

At first glance, NVIDIA (NVDA -0.25%) and NXP Semiconductors (NXPI 0.08%) don't seem to have much in common. NVIDIA is a veteran of computer graphics processors with a more recent eye on supercomputing and mobile chips. NXP was always a leader in the embedded and mobile spaces, and a recent megamerger only underscored the Dutch company's commitment to that market.

But the two semiconductor specialists have one absolutely crucial thing in common: Both NXP and NVIDIA are betting big on the emerging market for self-driving cars, hoping to establish themselves as big names in that space before the market shoots off into the stratosphere.

So the companies are very direct rivals in one of today's most promising growth markets. Which autonomous car chipmaker is the better fit for your investment portfolio?

By the numbers

Right now, NVIDIA is on a roll. Share prices have soared 166% higher over the last year. In the same time span, trailing earnings per share jumped 49% higher on an adjusted basis and sales grew by 14%. The brand new Pascal platform for high-performance graphics and data crunching chips was received with open arms. One has to imagine that NVIDIA's headquarters must be a pretty positive place to hang out nowadays.

NXP investors are not quite as happy with their current returns. Despite closing the acquisition of sector peer Freescale nine months ago, stock prices have fallen 6%. The Freescale deal more than doubled NXP's trailing earnings while boosting sales by 28%.

Valuation

If NVIDIA is a rocket stock that's headed for the stars, NXP's shares are more in a "wait and see" mode. Investors want to see evidence that the big, bold Freescale merger will pay dividends before lifting the stock any further.

Here's where the situation starts to get hairy.

NVIDIA's shares have skyrocketed recently. They are trading at 32 times trailing free cash flows and 39 times adjusted earnings. That's nosebleed territory. Owning this stock comes with a hefty side order of valuation-based risk. To rise any higher from here, NVIDIA must either keep increasing its bottom-line profits dramatically or inspire investors to widen the P/E and cash flow ratios even further.

NXP doesn't come with that kind of pressure. Trading at 23 times trailing cash flows and 21 times earnings, NXP investors have a far less bitter valuation pill to swallow. All else being equal, you'll sleep a lot easier with NXP stock under your pillow.

NXPI Price to Free Cash Flow (TTM) Chart

NXPI Price to Free Cash Flow (TTM) data by YCharts.

The automotive future

And that brings us right back to the automotive sector, where this discussion started. Cars are quickly becoming supercomputers on wheels, with high-powered chips powering everything from the door locks and ignition to the navigation system and the engine itself. And that trend is heating up even more as the next generation of cars might actually take the steering wheel out of our hands.

NXP is already an established giant in this crucial industry, sporting a 14.4% market share among all automotive chip sales. To give you a sense of NXP's market power, the second-largest supplier stands at at just 9.8%. The company reaches into every crevice of the modern car, from in-car communications and security to infotainment systems and self-driving platforms. Car-related chips accounted for 36% of NXP's recently reported second-quarter sales.

NVIDIA may have ambitions to challenge NXP's automotive domination, but it'll take a while. The company was the 37th-largest automotive semiconductor player in 2015, and automotive sales worked out to just 8.3% of NVIDIA's second-quarter revenue.

The Foolish bottom line

Long story short, NXP has a big head start over NVIDIA in the automotive sector, which both companies count as one of their most promising growth opportunities. Pair that situation with NVIDIA's far higher valuation ratios, and you'll quickly arrive in NXP's corner. This stock offers a much more attractive risk/reward balance than NVIDIA, and many investors would argue that NXP is downright spring-loaded for big gains in the next era of automotive computing.

Anders Bylund has no position in any stocks mentioned. The Motley Fool owns shares of and recommends NVIDIA and NXP Semiconductors.

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.

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Stocks Mentioned

NXP Semiconductors  Stock Quote
NXP Semiconductors
NXPI
$164.24 (0.08%) $0.14
Nvidia Stock Quote
Nvidia
NVDA
$157.87 (-0.25%) $0.40

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