Many investors are content with simply buying an index fund to match the S&P 500's return. And that's certainly better than not investing at all. But investing Foolishly includes the belief that individual investors can actually beat the market. To do this, however, investors must be selective, favoring certain companies over others. Along those lines, let's examine whether NXP Semiconductors (NXPI 4.18%) or Intel (INTC 0.64%) is the better buy right now.
NXP Semiconductors has a $33 billion market cap versus a $246 billion market cap for Intel, which might make this competition look like an aircraft carrier against a tugboat. While these two companies are vastly different in size, NXP recognized Intel, among other companies, as a key competitor in its 2018 annual report. Therefore, those considering an investment in NXP should ask: Why not buy stock in its bigger competitor?
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Riding the self-driving car trend
NXP is applying semiconductor technology to address four different markets, which it labels as automotive, industrial and Internet of Things (IoT), mobile, and communications infrastructure. Of these business segments, automotive is the largest, accounting for 48% of NXP's revenue in 2018.
Self-driving cars are where NXP really shines. The company claims to be "the No. 1 supplier for the complete radar subsystem" (sensors that detect things like the distance between vehicles, blind spots, and potential oncoming hazards). But the company is also capitalizing on the increased production of electric cars by offering battery management systems, a necessary component ensuring proper battery function and safety. Shipments just began on these systems in the last few months.
But even though NXP seems to be on the right side of growing trends, revenue and earnings per share have been completely stagnant over the last three years.
NXPI Revenue (TTM) data by YCharts. TTM = trailing 12 months.
Even though revenue and EPS have been lackluster, free cash flow is solid. The company has generated $1.2 billion in 2019 on $6.9 billion in revenue.
The semiconductor behemoth
Intel is one of the biggest players in the semiconductor industry. So far in 2019, it's generated $52 billion in revenue, nearly double NXP's entire market cap. Intel divides its revenue into PC-centric and data-centric categories. The former is its legacy processor business that turned Intel into the company we know today.
But the PC business is fading fast. In Intel's third quarter, there was a 5% drop in PC-centric revenue year over year. Data-centric revenue grew 6% and now represents 49% of total revenue. A significant portion of Intel's data-centric revenue comes from subsidiary Mobileye, acquired by Intel in 2017. Mobileye competes directly with NXP in the autonomous car space. Net revenue for Mobileye alone for the first nine months of 2019 is $639 million, up 24% from the first nine months of 2018.
One essential thing to consider with Intel is its research and development (R&D) budget. The semiconductor industry changes fast, and staying ahead of the curve with a product pipeline is important. So far this year, Intel has spent $14.6 billion on R&D -- more than doubling NXP's entire income. Needless to say, Intel has the means to stay competitive no matter which way the industry turns.
My choice today
It's hard to predict which of these two companies is better poised to capture upside from emerging tech trends like autonomous driving. Sure, Intel has a much bigger budget, but that hasn't kept NXP from rising to the top in autonomous driving to this point. To me, the potential reward is equal between the two companies. Both will pursue trends in autonomous driving, cloud computing, IoT, and 5G. Intel will spend more to win, but victory isn't guaranteed.
If both companies have upside, which upside could be more shareholder-friendly? Both are committed to returning 100% of free cash flow to investors via share buybacks and dividends. But one differentiation between the two is that Intel this year has converted 23% of revenue to free cash flow, as opposed to NXP's 17%.
Intel's superior free cash flow generation, coupled with its more-diverse revenue and massive R&D budget, lead me to believe that this stock has less risk than NXP Semiconductors and is, therefore, the better choice for investors today.
