Many semiconductor stocks rallied this year amid optimism about a potential trade deal. Dutch chipmaker NXP Semiconductors (NXPI -3.34%) was one of those stocks, jumping 35% this year and outperforming the Philadelphia Semiconductor Index's 31% gain. Intel (INTC -1.79%), however, was left out in the cold, as its stock rose just 7%.
NXP and Intel aren't direct competitors. NXP is the world's largest maker of automotive chips, while Intel is the top manufacturer of CPUs for PCs and data centers. Yet their interests overlap in certain areas, including connected cars and Internet of Things (IoT) devices. Let's take a closer look at these two big chipmakers and see which stock is the better buy.
Image source: Getty Images.
How do NXP and Intel make money?
NXP's core automotive chip business, which previously made it a takeover target for Qualcomm (QCOM -1.75%), generated nearly half its revenue last quarter. The remaining half was split among three other units: industrial and IoT chips, mobile chips, and communication infrastructure and other chips.
In May, NXP agreed to buy Marvell Technology's (MRVL -1.86%) wireless connectivity portfolio for $1.8 billion to enhance its IoT, automotive, and communication infrastructure businesses. That unit generated about $300 million in sales for Marvell in fiscal 2019, which equals 3% of NXP's projected revenue this year. However, NXP expects revenue from those assets to double by 2022.
Intel generated over half its revenue from its client computing unit last quarter. That unit produces its x86 CPUs for PCs. It also produced wireless modems for Apple, but abruptly lost that business to Qualcomm earlier this year.
Intel generated about 30% of its sales from its data center group during the quarter. That business supplies CPUs and other chips for Intel's near-monopoly in the data center market. The rest of Intel's revenue comes from its smaller IoT, non-volatile memory, programmable chip (Altera), and automotive chip (Mobileye) businesses.
Which chipmaker is growing faster?
NXP and Intel both struggled with decelerating sales growth over the past year.
|
YOY revenue growth |
Q1 2018 |
Q2 2018 |
Q3 2018 |
Q4 2018 |
Q1 2019 |
|---|---|---|---|---|---|
|
NXP |
3% |
4% |
2% |
(2%) |
(8%) |
|
Intel |
9% |
15% |
19% |
9% |
0% |
YOY = Year-over-year. Source: Company quarterly reports.
NXP's growth decelerated as demand slumped across its main sectors. Sluggish auto sales caused its automotive revenue to fall 8% annually last quarter, softer enterprise spending caused its IoT and industrial revenue to tumble 14%, and weak demand for smartphones caused its mobile revenue to fall 9%.
The only bright spot was its communication infrastructure unit, which posted 10% growth as telcos upgraded their networks. However, the midpoint of NXP's forecast for the second quarter -- which calls for its sales to rise 5% sequentially and decline 4% annually -- indicates that its core businesses are approaching a cyclical bottom. NXP didn't offer any guidance for the full year, but analysts expect its revenue to decline 4% as its earnings, buoyed by tighter cost controls and buybacks, improve 10%.
Image source: Getty Images.
Intel's growth decelerated as its data center unit, which posted a 6% annual sales decline last quarter, struggled with more cautious enterprise spending, tougher headwinds in China, and tougher competition from AMD.
Its client computing group also struggled with an ongoing chip shortage, but healthier demand for enterprise and gaming PCs offset some of those losses and boosted the unit's revenue 4% annually. Intel's IoT and Mobileye businesses also posted healthy growth, but its memory business was slammed by lower market prices as soft enterprise orders dented its programmable chips business.
Intel expects its second quarter revenue to decline 8% annually, and for its adjusted EPS to fall 14%. It expects its full-year revenue and earnings to fall 3% and 5%, respectively, as it struggles to overcome its chip shortage and data center woes.
Which stock is a better value?
NXP trades at 11 times forward earnings and pays a forward yield of 1%. Intel also trades at 11 times forward earnings but pays a higher forward yield of 2.5%.
NXP, which has an enterprise value of $34 billion, remains a potential takeover target for any chipmaker that wants to dominate the automotive market. The same can't be said about Intel, one of the biggest chipmakers in the world with an enterprise value of $240 billion.
I wouldn't be in a hurry to buy either stock right now. But if I had to choose one, I'd buy NXP for five reasons: It's approaching a cyclical bottom, the Marvell deal could strengthen that rebound, its earnings growth looks healthier, it doesn't face severe operational problems like Intel's chip shortage, and it's still a potential buyout target.
