There are some great semiconductor investments on the market today, but discerning the best ones to add to your long-term portfolio can be difficult. To help investors in that task, let's consider two very different chip companies: NVIDIA (NVDA 3.10%) and Cypress Semiconductor (CY).
NVIDIA's primary products are graphics processing units, originally used mostly for gaming, but now in demand for a wide array of computing needs. Cypress earns most of its revenue from its memory chips and is expanding further into embedded chips for the automotive market and the Internet of Things (IoT). So what does each have to offer investors, and which is the best buy overall?
Image source: Getty Images.
Financial fortitude
To sketch out the picture of how they're doing right now, let's start with each company's financials:
|
Company |
Cash |
Debt |
Net Income (TTM) |
Free Cash Flow (TTM) |
|---|---|---|---|---|
|
NVIDIA |
$6.3 billion |
$2 billion |
$2.5 billion |
$2.6 billion |
|
Cypress |
$120.1 million |
$1.13 billion |
($130 million) |
$233.3 million |
Data source: Yahoo Finance and YCharts.
There isn't much of a battle between these two when it comes to their balance sheets. NVIDIA is swimming in cash, had income of $2.5 billion over the last 12 months, and free cash flow of $2.6 billion. Meanwhile, Cypress Semiconductor's net income has been negative over the past year, and it's more than $1 billion in debt.
Winner: NVIDIA.
Opportunities and recent performance
Cypress' two main business segments are its microcontroller (MCU) and connectivity division (MCD) -- which includes its chips for connected cars and Internet of Things devices -- and its memory products division (MPD), which consists of memory chips for devices. Right now MCU revenue accounts for 34% of the company's top line, memory is still the top dog at 38%, and connectivity is 28% of total sales. If you break these out into specific segments, sales of chips into consumer products account for 35% of total revenue and automotive chip sales account for 30%.
The company's biggest opportunity lies in embedded chips -- chips that combine programmable processors with memory chips, and are used in the automotive market and for IoT. The company has deals with 24 out of 25 automotive original equipment manufacturers, and its embedded chips are helping power advanced driver assistance systems (ADAS). ADAS are the building blocks for semi-autonomous driving systems, and Cypress is hoping to leverage that position to tap into the driverless car market.
In the third quarter, Cypress's revenues increased by 15.4% to $604.6 million, and net income moved back into positive territory with $11 million, compared to a loss of nearly $23 million in Q3 2016. IoT revenue skyrocketed 80% year over year, which reflects the potential for the company in this space -- but IoT sales still only account for about 5% of its top line.
Meanwhile, NVIDIA dominates in graphics processing units with about 73% of the discrete GPU market, and continues to expand its footprint in the datacenter and automotive segments. For example, NVIDIA earned just $240 million in revenue from data center sales in its fiscal Q3 2017, but it jumped to $501 million in its fiscal Q3 2018 (which ended Oct. 29, 2017).
NVIDIA's GPUs are designed to process complex visual information, which makes them ideal for artificial intelligence uses both in data centers and semi-autonomous vehicles. NVIDIA believes its total addressable market in AI could equal nearly $40 billion between now and 2035.
NVIDIA's sales increased by 32% year over year to $2.64 billion in the fiscal Q3 2018, and its earnings per share grew by 60%. The company has continued to boost sales in its core gaming business as well, by 25% year over year, which has helped it remain stable while it pursues new growth areas.
NVIDIA's opportunities far exceed those of Cypress because its GPUs already dominate the desktop market, and are quickly finding homes in data centers and semi-autonomous vehicles, among other places. Cypress has lots of potential, but NVIDIA's strong gaming sales, combined with its new opportunities, make it the clear winner here.
Winner: NVIDIA.
Valuation and stock gains
NVIDIA is trading at a hefty 41 times anticipated forward earnings. That's much more expensive than the technology sector's average price-to-earnings ratio of about 26. Cypress Semiconductor is trading at about 13 times forward earnings, which makes it a relative bargain, but investors should remember that lower valuation is based on its earnings losses and lower stock performance.
While it is a bit pricier than Cypress right now, it's worth pointing out that NVIDIA's performance has been much more profitable for investors over the medium term. NVIDIA's shares have gained a staggering 880% over the past three years, while Cypress has remained essentially flat with just 4% gains. NVIDIA's huge gains combined with its high valuation balance out with Cypress' meager gains and much less expensive valuation. For this reason, I'm calling this one a draw.
Winner: Tie.
The verdict: NVIDIA for the win
NVIDIA deserves the overall nod here. The company is far better at growing its core business, is in great financial shape, and is consistently building out new opportunities. This doesn't mean that Cypress Semiconductor isn't a solid long-term investment, but when these two companies are compared head-to-head, I'd pick NVIDIA over Cypress right now.
