Chipmakers Ambarella (NASDAQ:AMBA) and Intel (NASDAQ:INTC) both underperformed the Philadelphia Semiconductor Index's 44% rally this year. Ambarella stayed nearly flat, while Intel rallied about 23%.

Ambarella and Intel are very different types of chipmakers -- the former makes SoCs (system on chips) for action cameras, security cameras, drones, and other devices, while the latter mostly sells x86 CPUs for PCs and data centers.

A graphical depiction of a semiconductor.

Image source: Getty Images.

However, Intel's new Myriad 2 computer vision chipsets -- which it gained through its recent purchase of Movidius -- are quickly becoming a major threat to Ambarella's image processing SoCs. Let's take a closer look at these two companies, how their businesses are overlapping, and which stock is the better buy at current prices.

Understanding Ambarella's core businesses

Ambarella rose to prominence as a supplier of image processing SoCs for GoPro's (NASDAQ:GPRO) action cameras. Its revenues surged during GoPro's heyday in late 2014 and early 2015, but quickly declined after sales of those cameras peaked.

In fiscal 2017 (which ended this January), 19% of Ambarella's revenues came from direct shipments to GoPro, with another 5% coming from shipments to GoPro's ODMs. But looking ahead, Ambarella expects revenue from GoPro to "represent a significantly smaller percentage of our total revenue in fiscal year 2018 and beyond."

That's because Ambarella hopes that sales of its chipsets for drone customers like DJI Innovations, security camera makers like Hikvision, and other companies will help it offset those declines and diversify its overall business. Unfortunately, that could be tough since GoPro, DJI, Hikvision, and other Ambarella customers are all shopping around for cheaper alternative chipsets with stronger computer vision features.

GoPro notably uses a custom chipset from Japanese chipmaker Socionext in its latest Hero 6 cameras, DJI uses the Myriad 2 in its portable Spark drone, and Hikvision also uses the Myriad 2 chipsets in some of its AI-powered cameras.

Ambarella plans to fight back with its upcoming CV1 computer vision chip, but it could be too little, too late. As a result, analysts expect Ambarella's revenue and earnings to respectively drop 5% and 35% this year.

DJI's Spark drone.

DJI's Spark drone. Image source: DJI.

Understanding Intel's core business

Intel is the world's largest provider of x86 CPUs for PCs and data centers, but its long-term future in both markets seems uncertain as upgrade cycles become longer and a resurgent AMD (NASDAQ:AMD) sets its sights on both markets with its new Ryzen CPUs. NVIDIA's expansion into the data center market with high-powered GPUs for machine learning needs is also troubling.

Intel also struggled to keep shrinking its die to produce next-gen chips. That's why it gradually stretched out its two-year, two-stage "tick-tock" cycle into a 30-month three-stage "process, architecture, optimization" cycle last year.

However, Intel recently struck back at AMD with new Coffee Lake chips (its final 14nm Skylake refresh), which beat Ryzen in raw performance benchmarks on mainstream desktops. Its Skylake-X also pulled ahead of AMD's Threadripper (two eight-core Ryzen CPUs) in higher-end machines. Intel also partnered with AMD to integrate Radeon graphics into new x86 chipsets, and then hired Raja Koduri, AMD's former chief architect of Radeon, to lead its new Core and Visual Computing Group.

86% of Intel's revenue came from PC and data center chips last quarter, but the rest came from the higher-growth IoT, memory, and programmable chips businesses -- all of which posted double-digit annual sales growth. Wall Street expects the growth of those newer businesses to offset the relatively slow businesses of its older businesses, respectively lifting its sales and earnings by 4% and 20% this year.

Why Intel is gunning for Ambarella

Intel needs to grow its IoT business, which posted 23% annual sales growth last quarter and accounted for 5% of its top line, to grow and increase its presence in nascent markets like autonomous drones and connected cars.

That's why Intel acquired companies like Mobileye, which produces crash avoidance systems for cars, AI start-ups like Nervana, and computer vision companies like Itseez and Movidius. Movidius' Myriad 2 represents a major threat to Ambarella's image processing SoCs, since it can be used as both an image processor and a computer vision chip -- as DJI recently demonstrated with the Spark.

Ambarella will try to counter this threat with the CV1, which has been in development for over four years, but it could struggle to match Intel's reach. But on the bright side, Intel might simply buy Ambarella -- as some recent buzz suggests -- instead of competing against it.

The valuations, dividends, and verdict...

Ambarella still trades at 35 times trailing earnings and 31 times next year's estimated earnings -- which look lofty compared to the industry average of 25 for semiconductor equipment makers. Intel trades at just 16 times trailing earnings and has a forward P/E of 14. Intel also pays a forward dividend yield of 2.4%, while Ambarella has never paid a dividend.

Based on these facts, it's clear that Intel is a better buy than Ambarella. A buyout might save Ambarella, but it's hard to see how the chipmaker can survive against bigger chipmakers like Intel over the long term.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Ambarella, GoPro, and Nvidia. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.