Qualcomm (QCOM +0.19%) and NVIDIA Corporation (NVDA +0.00%) are both dominant players in the technology sector, though they make their money doing very different things. Qualcomm's focus has been, primarily, in developing processors for mobile devices and selling baseband chips that allow mobile devices to connect to the Internet. Additionally, up until recently, the company also made a lot of its profit by licensing its 3G and 4G technology to tech companies (more on this later).
NVIDIA, on the other hand, makes the vast majority of its money by selling graphics processors for gaming. The company is a leader in the graphics card space and is using its processor know-how to expand into new markets, including driverless cars and artificial intelligence.
At one time, deciding between which of these companies to invest in may have been a difficult decision. But some recent stumbles by Qualcomm make the company much less attractive right now. At the same time, NVIDIA's potentially lucrative opportunities, along with its strong gaming business, are convincing many tech investors to buy its shares.
Let's take a look at each company's financial fortitude, competitive advantages, and valuations to get a complete picture of these two tech stocks and determine which is the better buy right now.
Image source: Getty Images.
Financial fortitude
|
Company |
Cash |
Debt |
Free Cash Flow (TTM) |
|---|---|---|---|
|
NVIDIA |
$7.1 billion |
$2 billion |
$4 billion |
|
Qualcomm |
$37.3 billion |
$23 billion |
$3.7 billion |
TTM = trailing 12 months. Data sources: Yahoo! Finance and Morningstar.
Neither of these companies looks in poor financial shape based on its cash, debt, and trailing free cash flow (FCF). Both have generated about $4 billion in FCF over the past 12 months, but Qualcomm has substantially more debt than NVIDIA. Significant debt isn't always a terrible sign, of course, and Qualcomm's $37 billion in cash helps offset its debt obligations.
Similarly, NVIDIA doesn't have all that much debt compared to Qualcomm, but it also has significantly less cash. Based on these metrics, I think this category is a draw. This doesn't mean either company won't have financial troubles ahead. I believe Qualcomm could face some problems in the near future as its patent licensing business becomes less profitable than it has been in the past. But for now, this match-up is a tie.
Winner: Tie.
Competitive advantage
When it comes to competitive advantage, Qualcomm used to be king. Tech companies all over the world had to pay Qualcomm a hefty licensing fee to use its 3G and 4G technology in their devices, and that brought in billions of dollars each year.
But over the past few years, Qualcomm's customers have filed lawsuits against the company because of the amount of fees it was charging, and Qualcomm has had to drastically cut back the amount it receives from its royalties. This has weighed down the company's top line over the past several years.
Additionally, Qualcomm used to be a bigger player in the mobile chip market, but many tech companies have opted for semiconductors made by Qualcomm's rivals, or developed their own. Qualcomm still has a lot of opportunity in the tech sector, and its purchase of NXP Semiconductors, which is still pending, could help the company expand further into the Internet of Things segment. But with its mobile processor dominance already slipping and its licensing business taking a hit, this tech giant has lost a lot of its competitive advantages over the past few years.
Meanwhile, NVIDIA is the clear leader in the graphics processing unit (GPU) market. The company held 66% of the discrete desktop GPU segment at the end of 2017, and it holds a slim lead over rival Advanced Micro Devices in the overall GPU market as well.
But what really helps set NVIDIA apart from its competitors is the company's growing potential to benefit from the driverless car and artificial intelligence markets. NVIDIA's GPUs are being used to process complex image information for autonomous vehicles. In the next few years, NVIDIA believes its GPUs will help bring fully driverless cars to market, and that autonomous vehicles will open up a total addressable market of $60 billion by 2035.
Additionally, NVIDIA has begun selling its GPUs to cloud-computing companies, including Amazon, to power some of their artificial intelligence data centers. Some of NVIDIA's rivals have been slower to do this, if at all, and it could soon become a considerable advantage for NVIDIA. The company believes GPU-powered artificial intelligence data centers will grow into a total addressable market of about $30 billion by 2023.
NVIDIA may not have an insurmountable moat of competitive advantages, but its early moves into AI and driverless car tech make its GPUs a go-to source for image processing, and that's enough of an advantage over its rivals for me to give NVIDIA the win in this category.
Winner: NVIDIA.
Valuation
Last, but not least, let's compare these two companies based on their trailing price-to-earnings ratios and forward P/E ratios.
|
Company |
Trailing P/E |
Forward P/E |
|---|---|---|
|
NVIDIA |
39.6 |
30.2 |
|
Qualcomm |
N/A |
15.9 |
Data source: Yahoo! Finance. Qualcomm's trailing P/E is unavailable because it's earnings were negative in the most recent year.
The S&P 500's average P/E right now is about 25, which makes NVIDIA's shares look relatively expensive. By comparison, Qualcomm's shares look cheap, based on its expected earnings, compared to the S&P 500 P/E average.
But just because a stock looks cheap doesn't necessarily means it's a great value. I think Qualcomm's falling revenue, stumbling patent licensing business, and diminishing influence in the mobile tech space translate into a lot of unknowns for investors. In contrast, I believe NVIDIA's strong core gaming business and its growth opportunities in AI, data centers, and driverless cars make the company's shares worth their premium price tag. For that reason, I'm giving NVIDIA the win here as the better value, not as the cheaper stock.
Winner: NVIDIA.
The verdict
Qualcomm may still have some life left in it, and I'm sure many value investors are giving the company a hard look right now. I think Qualcomm has the potential to benefit from the growing Internet of Things (IoT) market, especially if it can close the NXP Semiconductor purchase, but right now, the company simply has too many battles to fight for me to believe that it's a better buy over NVIDIA.
Meanwhile, NVIDIA offers investors strong and stable revenues from its gaming business and increasing opportunities into new markets. For those reasons, NVIDIA looks to be the clear winner over Qualcomm.
