Both Qualcomm (NASDAQ:QCOM) and NVIDIA (NASDAQ:NVDA) are major chipmakers that are betting on emerging markets like artificial intelligence, 5G, and autonomous vehicles. And while both have serious potential to benefit from growth in their respective markets, they are vastly different businesses.
If you're an investor who might want to add one of these semiconductor powerhouses to your portfolio, you'll want to know more about the trends they are banking on, and the potential pitfalls they face.
The case for Qualcomm
One of the biggest reasons to be bullish on Qualcomm is the impending shift from 4G LTE cellular connectivity to 5G. The new cellular standard will provide mobile internet speeds up to 20 times faster than 4G, and will enable a vast expansion of Internet of Things services.
5G could create $12.3 trillion in global economic output by 2035, and Qualcomm CEO Steve Mollenkopf has said that the new cellular standard represents a "significant opportunity" for the company, one of the leading suppliers of cellular modem chips. "[W]e enter into the 5G era with strength in products, a favorable competitive dynamic, and more customer diversity and technology breadth than in earlier generations of cellular," he said during the company's May earnings call.
Unfortunately, Qualcomm has faced barrage of lawsuits over how much it charges to license its modem technologies to device makers. Those legal battles, as well as the loss of lucrative licensing revenue from tech companies that refused to pay its fees over the past few years, have taken bites out of its earnings and its share price. Most recently, the company was hit with a $272 million antitrust fine from the E.U.'s European Commission.
The company did received a bit of good news recently, when the U.S. Department of Justice moved to delay enforcement of a court ruling that would force Qualcomm to lower how much it charges device makers for chip licensing fees.
Still, all of the company's instability around its licensing revenue leaves Qualcomm's future murky. The company certainly has a lot of potential to benefit from selling 5G chips, but with antitrust lawsuits continuing to plague the company, it's difficult for investors to know when it might shake off its litigation drama -- or what it might cost to do so.
The case for NVIDIA
NVIDIA is dealing with problems of its own right now. The company's sales fell 31% in the first quarter of this year, following a 24% drop in the fourth quarter. The graphics processing unit (GPU) maker's sales slid in large part due to stagnating demand for some of its chips following a slowdown in the cryptocurrency mining market.
As cryptocurrencies like bitcoin grew more popular -- and their prices soared -- chipmakers ramped up production of the processors necessary to mine them. That lead to an overabundance of chips when the economics of cryptocurrency mining shifted.
"The entire reason for Q4 and Q1 is attributed to oversupply in the channel as a result of cryptocurrency," said NVIDIA CEO Jensen Huan during the company's most recent investor call.
But long-term, NVIDIA's future still looks bright. It still holds 77% of the discrete desktop GPU market, and there's still enormous potential for it to sell more GPUs for use in data centers, artificial intelligence applications, and driverless cars -- all growing markets.
NVIDIA believes that its total addressable market (TAM) in data centers could be worth $50 billion by 2023, and that's on top of a driverless vehicle TAM that could reach $60 billion by 2035.
But what investors should focus their attention on today is how NVIDIA chips are selling in the market that provide the largest sahre of its revenue: video game. Gaming sales slipped year over year in Q1, but increased on a sequential basis, and gaming sales are expected to improve over the next two quarters. If NVIDIA can continue to grow its core business and tap into new trends, then its stock price should head higher.
While Qualcomm has significant opportunities to benefit from the deployment of new 5G networks, it can't compete with NVIDIA's opportunities. NVIDIA is already benefiting from gaming and data centers, and it has barely begun to tap the potential of the artificial intelligence and autonomous vehicle markets.
Most importantly, NVIDIA's future looks far more promising than Qualcomm's because NVIDIA is not burdened with a bevy of antitrust lawsuits. Investors are in the dark when it comes to Qualcomm -- there's no clarity about when it will wake up from its litigation nightmares, nor about how well it will be able to benefit from licensing its cellular technologies when it does. For all of those reasons, NVIDIA looks like the better long-term investment.