Better Buy: NXP Semiconductors vs. NVIDIA

One of these stocks is falling for good reason and the other really deserves better.

Anders Bylund
Anders Bylund
Dec 20, 2018 at 10:21AM
Technology and Telecom

NXP Semiconductors (NASDAQ:NXPI) recently saw a huge merger with Qualcomm (NASDAQ:QCOM) fall apart at the finish line. NVIDIA (NASDAQ:NVDA) rode the cryptocurrency markets to all-time highs last year, only to slide back down when surging cryptocoin prices plunged. Both stocks trade more than 30% lower in 2018. The two companies also have high hopes in the exciting market for automotive computing solutions.

So NXP and NVIDIA have a lot in common, but the truth is in the details. Which stock would serve your own portfolio better right now?

Let's have a look.

By the numbers

Metric

NXP

NVIDIA

Revenue (TTM)

$9.5 billion

$12.4 billion

EBITDA profits (TTM)

$4.7 billion

$5.0 billion

Free cash flows (TTM)

$3.7 billion

$3.4 billion

Market cap

$25 billion

$86 billion

Data from SEC filings and Finviz.com, current as of Dec. 19, 2018. TTM = trailing 12 months.

The figures above aren't exactly an apples-to-apples comparison. NXP pocketed a $2 billion breakup fee from Qualcomm in the third quarter, a truly unique one-time item that doubled the company's profits for that period.

That being said, NVIDIA is clearly the higher-flying market darling here. The graphics chip specialist's shares are trading at 28 times free cash flows and seven timesĀ  NVIDIA's annual sales. You can pick up NXP shares at the far lower price of 13 times trailing free cash flows or 2.7 times sales.

Two fencers facing off against each other in a dark room.

Image source: Getty Images.

What's the story?

Both of these stocks stand at the bottom of a raging roller coaster. But one of these drops is not like the other.

NVIDIA has been running a two-horse race for years, battling Advanced Micro Devices (NASDAQ:AMD) for supremacy in the field of computer graphics accelerators. In recent years, it turned out that the same chips are pretty good at mining certain types of cryptocurrencies. So when the crypto market soared sky-high in 2017, AMD's and NVIDIA's graphics chips were in high demand.

That artificial demand bubble popped in 2018 and all of the major cryptocurrencies are trading dramatically lower. That makes it hard for crypto enthusiasts (and professionals) to turn a profit from their crypto mining activities, accounting for the cost of number-crunching hardware and the electric power needed to keep everything running.

NVIDIA's management tried to play this off as a minor inconvenience at first, and so did AMD. But the sudden loss of product demand slowed down their skyrocketing revenue and cash profits, and share prices quickly followed suit.

NVIDIA bulls argue that this slowdown is temporary and the company is sure to get back on its high-growth feet again. Me, I'm not so sure. It seems to me that NVIDIA still can fall a long way before hitting rock bottom, and this company has a long history of inconsistent execution.

NXP, on the other hand, remains a leader in the emerging field of automotive computing where NVIDIA is a mere newcomer. This company offers a far less volatile and more predictable long-term growth trajectory than NVIDIA ever did. And the stock is still dirt cheap on the heels of Qualcomm's failed buyout, which is a curious reaction to NXP's continued existence as a stand-alone business with an extra $2 billion in cash reserves under its belt.

I'm so convinced of NXP's great value proposition here that I recently started a real-money position in the stock. You won't find me doing the same for NVIDIA anytime soon.