Better Buy: Qualcomm Inc. vs. NVIDIA

The stock market is backward-looking only to a certain degree. That's good, because otherwise, comparing NVIDIA (NVDA -3.87%) and Qualcomm (QCOM -2.53%) would be pointless.

NVIDIA's shares have rocked to the stratosphere in recent years, giving rise to concerns of an inflated share price. Qualcomm, on the other hand, has seen its stock price languish as a worldwide legal blitz has overridden its otherwise attractive prospects.

So which company's shares are the better buy today? Let's run Qualcomm and NVIDIA through a three-part analysis to find out.

Financial fortitude

As two of the world's largest semiconductor makers, Qualcomm and NVIDIA are on firm financial footing. Here's an overview of four important metrics regarding their solvency and liquidity:

Data sources: Qualcomm and NVIDIA investor relations, Yahoo Finance. 

Qualcomm easily beats NVIDIA on a net-cash basis -- shorthand for cash and investments minus debt -- and cash flow from operations. However, Qualcomm's balance-sheet composition will undergo a big change in the coming months as it closes its $47 billion deal to acquire NXP Semiconductor (NXPI -1.63%), assuming its legal woes don't scuttle the deal. The company has said it will finance the all-cash transaction through a mix of current cash and to-be-issued debt. So NVIDIA could beat Qualcomm in the long run, in terms of financial strength. NVIDIA's case is further strengthened by its current ratio, which easily beats Qualcomm's. However, until the deal closes, Qualcomm's financial might is simply too hard to ignore here.

Winner: Qualcomm.

Image source: Getty Images.

Durable competitive advantages

Under normal circumstances, Qualcomm and NVIDIA could be seen as relative equals in terms of their competitive advantages. But NVIDIA has never been stronger. The company's revenue base remains concentrated on high-end console gaming, but its self-driving-car and artificial-intelligence (AI) segments should become increasingly important pieces of the business in the years to come.

The magnitude of the economic opportunity that areas such as big data, virtual reality, autonomous vehicles, and AI present will attract additional competition. However, NVIDIA's GPUs remain the gold standard today, and it follows that the company will retain its ability to keep its chips a generation ahead of competitors such as Advanced Micro Devices.

Unlike NVIDIA, Qualcomm gained increased prominence by capitalizing on the rise of mobile computing. The company is the world's largest standalone mobile-chip producer. with its Snapdragon mobile processors powering 155 smartphones around the world today. Qualcomm also licenses its hoard of foundational mobile-connectivity patents to handset manufacturers.

Qualcomm's patent division is the business' core profit center. However, the San Diego-based chipmaker has been hit with a raft of antitrust lawsuits that could imperil its entire intellectual-property licensing business model. Things are still unfolding on this front, which heightens the company's risk profile. That gives NVIDIA a slight edge here.

Winner: NVIDIA.

Valuation

Finally, let's review which company offers investors a better value today. Here are three popular valuation metrics for both Qualcomm and NVIDIA.

Data sources: Yahoo! Finance, Reuters. 

There's a drastic difference between the companies' valuations. However, valuation is a relative art, and to understand whether a company ever appears cheap depends on how quickly it's expected to grow.

To that end, Wall Street expects Qualcomm to see its sales contract 3.4% this year and then increase 0.4% in 2018. Though its shares are cheaper than the market -- the S&P 500 trades at 25 times earnings -- the company's zero-growth expectations make this kind of a valuation understandable.

NVIDIA, meanwhile, is expected to increase its sales 19.4% this year and 12.3% next year. Its long-term growth horizon implies that it should grow at above average rates for years to come, but its moderate near-term growth rates seem out of whack with its lofty multiples.

Winner: Qualcomm.

And the winner is... a tie

Both companies have their strengths. Qualcomm offers value, ample financial stability, and some interesting growth prospects in the event that its legal headaches pass. However, given the uncertainty surrounding the future of its most important business segment, I'd say Qualcomm should be avoided right now.

On the other hand, NVIDIA has its own problems, including its expensive stock. Since both companies have strong points and legitimate issues, it seems fair to call this showdown of heavyweight chipmakers a tie.