NXP Semiconductors (NXPI 0.57%) and NVIDIA (NVDA 5.60%) aren't direct competitors, but both companies provide chips for connected cars. NXP became the top automotive chipmaker in the world after buying Freescale four years ago, while NVIDIA's Drive platforms power a growing number of driverless cars.

Shares of NXP and NVIDIA both rallied about 60% this year and outperformed the Philadelphia Semiconductor Index's near-50% gain, despite persistent concerns about macro headwinds and sluggish chip sales. Let's see which semiconductor stock still has more room to run.

An aerial view of a highway overpass with an overlay of connectivity icons.

Image source: Getty Images.

How do NXP and NVIDIA make money?

NXP's automotive chips generated 46% of its revenue last quarter. 21% came from its communication infrastructure and other chips, 19% came from its industrial and IoT (Internet of Things) chips, and the remaining 14% came from its mobile chips.

Earlier this year, NXP agreed to buy Marvell Technology's (MRVL 0.87%) wireless connectivity portfolio for $1.8 billion to strengthen its IoT, automotive, and communication infrastructure businesses.

That unit generated about $300 million in revenue from Marvell in fiscal 2019, which equals about 3% of NXP's projected revenue in 2020. NXP expects to close the deal, which will be accretive to its operating profit within the first full quarter, in the first quarter of 2020.

NVIDIA generated 55% of its revenue from gaming chips last quarter. 24% came from data center chips, 11% came from professional visualization chips, 5% came from automotive chips, and the remaining 5% came from OEM chips and other products.

85% of NVIDIA's revenue came from its GeForce GPUs, which power PCs, workstations, and data centers, during the quarter. 15% came from its ARM-based Tegra CPUs, which power gaming devices like the Nintendo Switch, set-top boxes, and its Drive computers for autonomous cars.

NVIDIA agreed to acquire communication equipment maker Mellanox (MLNX) for $6.9 billion earlier this year. That acquisition should boost NVIDIA's revenue by over $1.3 billion next year and be "immediately" accretive to its non-GAAP earnings, margins, and free cash flow when it closes in late 2019.

How fast are NXP and NVIDIA growing?

NXP's revenue fell annually across its automotive, industrial and IoT, and communications infrastructure units last quarter as macro headwinds battered the automotive, industrial, and service provider sectors.

Only the mobile unit squeezed out 2% growth, thanks to a seasonal recovery in smartphone sales. NXP's total revenue still fell 7% annually, but rose 2% sequentially on warmer demand across its automotive, industrial and IoT, and mobile businesses.

NXP expects its revenue to dip 6% annually in the fourth quarter and remain flat sequentially, which indicates that its cyclical declines are bottoming out. Wall Street expects its revenue to fall 6% this year but grow 5% next year as the cyclical headwinds dissipate and it reaps the initial benefits of the Marvell acquisition.

A network of connected things sprouts out of a man's finger.

Image source: Getty Images.

NVIDIA's revenue slid 5% annually last quarter, as the continued weakness of its gaming, data center, professional visualization, and OEM markets offset its rising sales of professional visualization GPUs. But on a sequential basis, NVIDIA's revenue rose 17% as all of its markets -- except automotive chips -- recovered.

NVIDIA's sales were bolstered by the launch of its new GPUs, but those new chips still face tough competition from AMD's new Radeon GPUs. It attributed the soft growth of its auto business to a one-time development services contract, the "roll-off" from its legacy infotainment business, and "general industry weakness."

For the fourth quarter, NVIDIA expects its revenue (excluding any potential gains from Mellanox) to fall 17% sequentially but rise 13% annually to $2.5 billion, with robust demand for its data center chips offsetting seasonal declines in its notebook GPU and Switch markets. Analysts expect NVIDIA's revenue to dip 8% this year but rise 19% next year as its core markets recover and it absorbs Mellanox's data center-oriented business.

Profitability and valuations

NXP's revenue growth is still sluggish, but its gross and operating margins are improving. As a result, analysts expect its earnings to grow 7% this year and 10% next year -- solid growth rates for a stock that trades at just 14 times forward earnings.

NVIDIA's margins are also expanding as its revenue growth accelerates again. Wall Street expect its earnings to dip 16% this year, followed by 30% growth next year. Its stock is reasonably valued relative to that growth rate at 30 times forward earnings.

NXP's forward dividend yield of 1.3% is low compared to those of other mature tech stocks, but it easily beats NVIDIA's paltry forward yield of 0.3%. NXP's enterprise value of $38 billion is also much lower than NVIDIA's EV of $125 billion. Therefore, bigger chipmakers still might be interested in buying NXP, even after Qualcomm gave up on acquiring the Dutch chipmaker last year.

The winner: NXP

NXP and NVIDIA are well-poised for cyclical recoveries, and both stocks could keep outperforming the Philadelphia Semiconductor Index. However, NXP has a lower valuation, higher yield, and fewer direct competitors than NVIDIA, which make it the more compelling investment.