Qualcomm (NASDAQ:QCOM) and NVIDIA (NASDAQ:NVDA) have both led their respective technology markets for years, and technology investors are right to take notice of both companies. Qualcomm makes mobile processors and baseband chips (modems) that have become staples in the mobile industry. Additionally, the company has a treasure trove of intellectual property that it licenses to smartphone makers. If you've ever owned a smartphone -- of any kind -- then you've almost certainly used Qualcomm's technologies.

NVIDIA may be lesser known than Qualcomm but the company has become one of the most dominant players across several growing tech industries. NVIDIA's graphics processors dominate the discrete desktop graphics processing unit (GPU) market and its artificial intelligence (AI) hardware and software is quickly becoming a leader in the driverless car space.

With both companies already such an integral part of so many technologies, it can be hard to assess which company has the better stock to buy right now. So let's look at the financial fortitude of both, what their competitive advantages are, and each one's current valuation to figure out which is the better buy right now.

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Image source: Getty Images.

Financial fortitude

First, let's compare a few key financial metrics:

Company Cash Debt Net Income (TTM) Free Cash Flow (TTM)
NVIDIA $5.88 billion $2.08 billion $2.29 billion $1.94 billion
Qualcomm $20.86 billion $21.9 billion $3.9 billion $3.78 billion

Data source: Yahoo! Finance and Morningstar.

Qualcomm has substantially more cash than NVIDIA, but it also has a lot more debt as well. It's also worth pointing out that Qualcomm is currently buying an Internet of Things company called NXP Semiconductors and has suffered several years of lawsuits stemming from its patent licensing fees. What this means for Qualcomm is that it'll likely use much of its cash to pay for the NXP purchase and could, at the same time, earn less in the future from its lucrative patent licensing, both of which could weigh down the company's financial outlook for a while. For those reasons, and because of its current debt, I have to give NVIDIA the advantage here.

Winner: NVIDIA.

Competitive advantage

Any company you invest in should have some sort of competitive advantage and NVIDIA is a good example of just that. NVIDIA makes about 53% of its total revenue from sales of its GPUs in the gaming market and over the years it's amassed a desktop discrete GPU market share of 72.5%. That means that computer companies that are looking to put high-end graphics processors into their computers consistently rely on NVIDIA's tech.

The company is also a key player in the growing driverless car market and sells its Drive PX 2 supercomputer to automakers who want to bring semi-autonomous features to their cars. NVIDIA's Drive PX system has made huge gains through partnerships with Audi, Tesla, Toyota, Baidu, and others. There are no winners in the driverless car space right now and NVIDIA will have to continue outpacing competitors like Intel's Mobileye in the driverless tech space, but for now NVIDIA is one of the leading semi-autonomous driving companies and it's showing no signs of slowing down.

Investors should know that while NVIDIA's total addressable market in driverless cars could reach $8 billion by 2025, the company only made $142 million -- or about 6% of its total revenue -- from its automotive business in its fiscal third quarter 2018.

If all that weren't enough, NVIDIA's GPUs are also powering some of the most sophisticated artificial intelligence (AI) servers available today. Google, Facebook, Amazon, and others have used NVIDIA's GPUs and no other company comes close to its graphics processing power right now.

For years, Qualcomm's main competitive advantage has been its plethora of intellectual property (IP) for how mobile devices connect to 3G and 4G networks. The company's IP business (called Qualcomm Technology Licensing, or QTL) accounts for about 21% of its total revenue, but also brings in a substantial amount of the company's profits. QTL accounted for 73% of the company's pre-tax earnings as a percentage of revenue in the fiscal third quarter 2017.

But Qualcomm's intellectual property isn't as important as it used to be. The majority of the company's patents have to do with 3G cellular connectivity and as more mobile devices rely on 4G and LTE connections, Qualcomm hasn't been able to earn as much from its patents as it had in the past. QTL revenue fell 42% year over year in the most recent quarter.

Additionally, while Qualcomm's processors have been widely used in many smartphones, some companies, like Samsung, have created their own chips to power some of their devices. That's cut down the amount of processors Qualcomm supplies to smartphones makers. And to make matters worse, Apple now splits its baseband orders (the chips for cellular connection) between Qualcomm and rival Intel, instead of exclusively ordering from Qualcomm, as it had in the past. Apple is also suing Qualcomm for $1 billion because it says Qualcomm collected too much in licensing fees from the iPhone maker. Apple is currently refusing to pay Qualcomm until things get resolved, which is wrecking Qualcomm's financials.

All of this means that some of Qualcomm's mobile dominance in both processors and intellectual property licensing has slipped over the past few years, which leaves the company without much of a competitive edge at the moment. 

Winner: NVIDIA.

Valuation

Finally, let's take a look at the valuations of both companies by looking at their price-to-earnings (P/E) ratio, based on past earnings, and their forward P/E ratio, based on expected earnings. The P/E ratio tells us how much investors are willing to spend for every dollar of company earnings, and the forward P/E gives us an idea of what investors are spending for every dollar of the company's future expected earnings.

Company P/E Ratio Forward P/E
NVIDIA 55.1 41.7
Qualcomm 17.2 15.2

Data source: Yahoo! Finance.

Qualcomm's current P/E ratio of 17.2 is substantially lower than NVIDIA's 55.1. Not only does Qualcomm's stock look much cheaper when compared to NVIDIA, but it's also less expensive than the technology industry's average of about 26. NVIDIA technically looks "expensive" by this standard, so I'm giving Qualcomm the win for this one. But it's worth noting that you shouldn't make any investment decision based on this one metric, or any metric, alone.

Winner: Qualcomm.

The verdict

I'm giving the overall win here to NVIDIA based on both its financial fortitude and competitive advantages. NVIDIA is both dominating the GPU space and forging new opportunities, meanwhile Qualcomm continues to face ongoing litigation issues and is in the midst of a $1 billion lawsuit from Apple. More importantly, those lawsuits are changing how much Qualcomm can charge for its patent licensing fees, which is likely to negatively affect the company's profits from its licensing business. Qualcomm will probably end up with new revenue streams from its NXP purchase, but investors will have to wait awhile to see how well that bet plays out.

Chris Neiger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Apple, Baidu, Facebook, Nvidia, and Tesla. The Motley Fool owns shares of Qualcomm. The Motley Fool recommends Intel and NXP Semiconductors. The Motley Fool has a disclosure policy.