NVIDIA Corp. (NVDA 1.17%) and Cypress Semiconductor (CY +0.00%) are both semiconductor companies, but, for the most part, they vary wildly in their approaches. Cypress mainly makes memory chips and semiconductors that are commonly used for Internet of Things applications, while NVIDIA's graphics processors are used primarily for gaming, though it is expanding its reach into data centers and driverless cars as well.
Both companies are growing quickly, and each could make a good long-term investment -- so let's take a closer look to see which one is the better buy right now.
Image source: Getty Images.
Financial fortitude
| Company | Cash | Debt | Net Income (TTM) | Free Cash Flow (TTM) |
|---|---|---|---|---|
| NVIDIA | $7.1 billion | $2 billion | $3 billion | $2.6 billion |
| Cypress Semiconductor | $151.6 million | $956.5 million | ($93.6 million) | $233 million |
Data sources: Yahoo! Finance and Morningstar.
If you take a look at the figures above, you'll notice that NVIDIA is outperforming Cypress Semiconductor nearly across the board, and has enough cash and positive net income to offset its $2 billion in debt. Cypress isn't in bad financial shape, but its income has been in the red six out the past seven years.
The case for NVIDIA
There's a lot of buzz around NVIDIA right now because of the company's opportunities in the artificial intelligence (AI) and autonomous vehicle markets. Its GPUs have quickly gained acclaim for their ability to rapidly process vast amounts of image data, which makes them ideal for those uses.
NVIDIA's chips are also being used in the data centers of major tech companies such as Amazon and Facebook. As the use of AI grows, the chipmaker is poised to grow along with it because more and more companies are making use of graphics processors in their data centers. Additionally, its just-released third-generation driverless car computer, the Pegasus Drive PX, is expected to bring Level 5 (full) autonomy to cars some time in 2019. Already, nearly two dozen companies have signed up to use the platform. NVIDIA's management has estimated that its total addressable market in AI (driverless cars included) could reach $40 billion by 2025.
Investors' optimism about all these opportunities has pushed the company's share price up by 144% over the past 12 months.
I should also point out that about 59% of NVIDIA's top line still derives from sales of GPUs for gaming. That's great news, because it means the company's most stable and profitable business is providing enough financial stability to allow it to pursue new opportunities. But it should also serve as a reminder to potential shareholders about where NVIDIA's revenue is actually coming from.
The case for Cypress Semiconductor
Cypress's Semiconductor's sales are spread across three main areas: its memory products division (MPD), its connectivity division (MCD), and its microcontroller division (MCU). The company just reported its fourth-quarter 2017 results at the beginning of February: MPD accounted for 40% of its sales, MCU was 33%, and MCD was 27%. Overall, sales were up 12.7% in the quarter to $597.5 million.
But just like NVIDIA, Cypress has some new opportunities in the driverless car market. The company currently has a 65% market share in the NOR flash segment for vehicles, where its memory chips are used in Advanced Driver Assistance Systems (ADAS). Already, 24 out of 25 automotive companies use Cypress' chips in their ADAS.
Cypress's Semiconductor's automotive sales were up 16% in 2017, and overall sales were up 20%. That's certainly positive news, but investors should note that the company isn't profitable right now. Though I'd like the see some positive earnings from the company, of course, Cypress' shares are trading at just 12 times the company's expected forward earnings. That's far below the tech industry average, so its stock looks like a bargain.
The verdict
NVIDIA's strong financial performance and its fast-growing opportunities in both autonomous vehicles and artificial intelligence give it the win in this match-up. But investors should keep in mind that its shares already trade at 33 times its forward earnings, so it'll need to grow steadily and fast in order to justify that premium.
