Both Intel (INTC +4.00%) and Qualcomm (QCOM 0.03%) have experienced the highs of being on top of their respective markets. Qualcomm raked in profits over the years from its stockpile of 3G and 4G patents, and from sales of its mobile processors and baseband chips (for cellular connectivity). The company has fallen on some hard times as of late, but it's pursuing new markets as it tries to mount a comeback.
Meanwhile, Intel's PC processor dominance is well-known, but as demand for personal computers has slipped, so has the tech giant's dominance. Intel is in the midst of transitioning to the Internet of Things and other potential markets to find new uses for its processor prowess.
With each of the companies' best days seemingly behind them, investors may be wondering which of these two tech behemoths has a brighter future. So, let's take a look at Intel and Qualcomm's financial strength, competitive advantages, and valuation in order to find out.
Image source: Getty Images.
Financial fortitude
First, let's take a look at how well these two companies are doing financially:
|
Company |
Cash |
Debt |
Net Income (TTM) |
Free Cash Flow (TTM) |
|---|---|---|---|---|
|
Intel |
$25.9 billion |
$31.9 billion |
$12.7 billion |
$11.7 billion |
|
Qualcomm |
$20.86 billion |
$21.9 billion |
$3.9 billion |
$3.78 billion |
Data source: Yahoo! Finance and Morningstar.
Intel and Qualcomm have comparable amounts of cash, though Intel is carrying $10 billion more in debt. Nearly $32 billion in debt isn't a great thing to see, of course, but the company does have significantly more net income than Qualcomm and far surpasses its free cash flow as well. Additionally, and I'll get more into this later, Qualcomm is likely to see more of its profits slip as it faces lawsuits over its patent licensing fees. This will hurt the company's profits and could weigh on the company's financial strength for the foreseeable future -- all of which means that Intel appears to be more financially stable at the moment.
Winner: Intel.
Competitive advantage
Intel's dominance in the chip business has taken a few hits as PC sales have declined, but that doesn't mean there isn't plenty of fight left in this company. Investors should remember that the company still has a very strong position in the data server space -- which accounted for about 30% of the company's second-quarter 2017 revenue.
No other company comes close to Intel's position in servers, and that's good news as cloud computing spending is expected to hit $1 trillion (yes trillion) between 2016 and 2020, according to research firm Gartner. Intel holds about 98% market share in the cloud-computing chip space right now, which means the company should easily benefit from all of the increased cloud spending.
Additionally, Intel recently purchased Mobileye, which is one of the leading providers of advanced driver assistance systems (ADAS). Mobileye currently holds at least 60% of the ADAS market, and Intel's purchase of the company means the chipmaker is now a key player in the semi-autonomous car market. Intel could use its chip know-how, along with Mobileye's tech, to help build a strong position in the driverless car market, which is estimated to be worth $77 billion by 2035.
Qualcomm is still a dominant force in the mobile space, but investors should take note of the company's diminishing status. The company still earns most of its profits from its patent licensing business, but that isn't the cash cow it once was. Regulators and even its own customers have sued Qualcomm to lower the amount of profit the company makes from the licenses, and those problems aren't going away anytime soon. Even Apple has jumped into Qualcomm's litigation nightmare and is seeking $1 billion from the company.
Additionally, many mobile companies are transitioning to making their own mobile processors in-house, rather than looking to Qualcomm's processors. This shift means Qualcomm is looking to new revenue streams for its future growth. The company may have found one in NXP Semiconductors (NXPI +0.72%), which is the leading supplier of processors for vehicles. Qualcomm is in the processes of finalizing that deal right now, and it could provide the company with a strong position in the driverless car market if regulators approve it.
Though Intel and Qualcomm are both looking to transition to new key markets, I have to give Intel the competitive advantage win because of its huge opportunities in the data center space. Intel is perfectly positioned to benefit as cloud computing spending increases and that should help keep the company stable as it pursues more diverse revenue opportunities. Meanwhile, Qualcomm is seeing its largest profit-generating business dwindle, and the only major prospect it has right now is its purchase of NXP, which is facing some hurdles.
Winner: Intel.
Valuation
Last, but not least, let's compare a couple of key metrics for Intel and Qualcomm. We're looking here at each company's price-to-earnings (P/E) ratio and their forward P/E ratios. The P/E ratio tells us how much investors are willing to pay for every dollar of company earnings, and the forward P/E shows us how much investors are spending per share, based on future earnings.
|
Company |
P/E Ratio |
Forward P/E |
|---|---|---|
|
Intel |
13.5 |
11.4 |
|
Qualcomm |
19.3 |
14.9 |
Data source: Yahoo! Finance.
Neither stock looks all that expensive right now compared to each other, or when compared to the technology sector's average P/E ratio of about 27. But since Intel investors are spending just 13.5 times the company's trailing-12-month earnings, compared to 19 times for Qualcomm's stock, Intel gets the win for this one. It's worth pointing out that P/E ratios are just one metric for investors to look at when comparing stocks, and it's not a catch-all for how to pick a winning stock.
Winner: Intel
The verdict
It looks as though Intel is the better buy overall, based on the comparisons above. Qualcomm still has a lot going for it, and if it can emerge from its quagmire of patent litigation and transition into new, profitable segments with its NXP purchase, then the company might be a good long-term play. But for now, there are just too many uncertainties with Qualcomm. Investors should know that Intel still has a lot of work ahead of it, too, as the company moves away from its old PC chip business and embraces a promising, but uncertain, future.
