NVIDIA (NVDA 1.44%) and Qualcomm (QCOM 0.14%) have been on very different paths over the past five years. During that period, shares of NVIDIA rallied more than 700%, but shares of Qualcomm fell 15%.
NVIDIA's growth was attributed to robust sales of its gaming GPUs, the introduction of new high-end GPUs for data centers, and the popularity of its ARM-based Tegra chips in connected cars. Qualcomm's decline was caused by new competitors entering the mobile application processor market, smartphone makers pumping out their own chips, and defiant companies and governments protesting its 3G/4G licensing fees.
But past performance never guarantees future returns. Let's take a fresh look at both chipmakers to see which stock is a better buy at current prices.
How fast are NVIDIA and Qualcomm growing?
NVIDIA's sales rose 38% to $6.91 billion in fiscal 2017, and Wall Street expects another 16% growth this year. Most of NVIDIA's revenue still comes from its flagship GeForce gaming GPUs. Demand from high-end gamers has stayed resilient despite sluggish PC sales worldwide, and recovering PC sales and next-gen games are now fueling a fresh cycle of upgrades. Sales of NVIDIA's GPUs rose 66% annually and accounted for almost 62% of its top line last quarter.
Data center revenues soared more than 200% and accounted for 14% of NVIDIA's revenues, thanks to the growing use of its high-end GPUs for machine learning purposes. Automotive revenues climbed 38% and accounted for 6% of its revenues. The Professional Visualization unit, which accounted for 10% of its sales, grew 18%.
Qualcomm's revenue dropped 7% to $23.6 billion in fiscal 2016, and analysts anticipate a 3% decline this year. That's because competition from cheaper chipmakers like MediaTek and first-party chips from OEMs like Huawei are throttling the growth of its chipmaking business, which generates most of its revenues.
The licensing business, which generates less revenue but accounts for most of Qualcomm's profits, has also struggled with numerous fines, lawsuits, and probes by companies and regulators demanding lower fees. An ongoing legal clash with Apple (AAPL 1.56%) over licensing fees also recently forced Qualcomm to reduce its third quarter sales forecast by $500 million.
On the bright side, Qualcomm's chipmaking revenues rose 10% annually to $3.7 billion last quarter on healthy demand for its high-end Snapdragon chips and new chip designs for Internet of Things devices, drones, and connected cars. Licensing revenue improved 5% after Qualcomm renegotiated licensing terms with individual OEMs across China. Lastly, Qualcomm's planned buyout of NXP Semiconductors will boost its projected revenues by nearly 40% and make it the largest automotive chipmaker in the world.
Profit growth, buybacks, and dividends
NVIDIA's earnings rose 138% in 2017, but analysts expect that growth to slow to 11% this year. That slowdown is attributed to the expiration of a graphics licensing deal with Intel, which was providing it with $66 million in "free" revenues per quarter; increased price competition in GPUs from AMD's new Radeon cards; and tougher competition in the automotive market from expanding players like Qualcomm.
Qualcomm's earnings dipped 5% in 2016, and analysts anticipate another 1% drop this year. That's mainly due to the ongoing challenges at its high-margin licensing business -- which was fined in China and South Korea, probed in the U.S. over antitrust allegations, and sued by Apple over lopsided licensing deals. If Qualcomm is forced to reduce its licensing fees (up to 5% of the wholesale price of a device), its bottom line growth could take a big hit.
Both chipmakers use buybacks to boost their earnings and offset stock-based compensation. NVIDIA spent $739 million -- nearly half its free cash flow -- over the past 12 months on buybacks. Qualcomm spent $1.6 billion, or 29% of its FCF, on buybacks during that period.
As for dividends, NVIDIA pays a paltry forward yield of 0.5%, but its payout ratio of 19% indicates that it has plenty of room to hike that payout. Qualcomm pays a much higher forward yield of 4.3%, which is supported by a payout ratio of 71%.
The valuations and verdict
NVIDIA trades at 40 times earnings, which is much higher than its industry average of 28. Its P/S ratio of 10 is also much higher than the industry average of 4. The bulls might argue that premium is justified by its growth, while the bears will claim that those valuations are too high for a company with slowing growth.
Qualcomm trades at 18 times earnings, which is much lower than its industry average of 27. Its P/S ratio of 3 is also lower than the industry average of 4. Those lower valuations reflect the stock's depressed state after being hammered by the aforementioned competition, probes, fines, and lawsuits.
I personally like NVIDIA more as a company than Qualcomm, but its valuations are simply too high. I'm concerned about Qualcomm's long-term future, but its expansion into adjacent markets, higher dividend, and lower valuations all make it a smarter buy at current prices.