NVIDIA (NASDAQ:NVDA) and Qualcomm (NASDAQ:QCOM) are two bellwethers of the semiconductor market. NVIDIA is the top maker of discrete GPUs, most of which are used in high-end gaming PCs. Qualcomm is the world's largest producer of mobile chipsets and baseband modems.

NVIDIA's stock surged 140% over the past 12 months, crushing Qualcomm's gain of just over 20%. Let's see why the GPU maker attracted a stampede of bulls, and whether or not it will remain a stronger investment than Qualcomm.

An illustration of a chip on a circuit board.

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Why do the bulls love NVIDIA?

NVIDIA's gaming GPU business stalled out at the end of fiscal 2019 (which ended in Jan. 2019) as the cryptocurrency mining bubble burst. However, those sales stabilized and accelerated again as it launched its new Turing GPUs last year.

Meanwhile, demand for NVIDIA's high-end data center GPUs, which are used for machine learning and AI tasks, continued rising, especially in the cloud and HPC (high-performance computing) markets. Its recent introduction of its new Ampere data center GPUs, along with its acquisition of data center equipment maker Mellanox, complement that growth.

The strength of those two markets, along with the stability of its professional visualization business, partly offset the softness of its cyclical auto business, which mainly provides ARM-based Tegra CPUs for connected and driverless cars.

NVIDIA's revenue and adjusted EPS declined 7% and 13%, respectively, in fiscal 2020, as it worked through its cryptocurrency-related issues in the first half of the year. However, NVIDIA's revenue surged 39% annually in the first quarter of 2021 as its adjusted EPS more than doubled, buoyed by record sales of its data center GPUs.

Wall Street expects NVIDIA's revenue to rise 34% this year, as the headwinds dissipate and the tailwinds accelerate.

Why aren't the bulls impressed by Qualcomm?

Qualcomm generates most of its revenue from its Snapdragon mobile chipsets, but it generates most of its profits from its portfolio of wireless licenses, which collects a cut of every smartphone sold worldwide.

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Image source: Getty Images.

For many years, Qualcomm subsidized the growth of its lower-margin chipmaking business with its higher-margin licensing revenue. However, that business model is now being challenged by regulators and OEMs, which claim its licensing fees are too high. Rival chipmakers, including NVIDIA, also claim Qualcomm bundled its chips and licenses at lower prices to force its competitors out of the market.

Qualcomm was also caught in a triangle of failed acquisitions two years ago: It fended off Broadcom's hostile bid, but failed to buy NXP Semiconductors. Royalty disputes with Apple and Huawei, along with sluggish sales of smartphones worldwide, exacerbated the pain.

As a result, Qualcomm's adjusted revenue and earnings declined 14% and 2%, respectively, in fiscal 2019 (which ended last September). But for fiscal 2020, analysts expect revenue to rise 8% with 4% earnings growth, supported by easier year-over-year comparisons, the resolution of its dispute with Apple, and the upcoming launches of new 5G devices.

The dividends and valuations

NVIDIA trades at over 50 times forward earnings and pays a tiny forward dividend yield of less than 0.2%. Qualcomm trades at less than 17 times forward earnings and pays a much higher forward yield of 2.8%.

Investors are paying a higher premium for NVIDIA because they expect its data center and gaming businesses -- which are both better insulated from the COVID-19 crisis than other markets -- to remain strong. They're far less enthusiastic about Qualcomm, which is still heavily dependent on the saturated smartphone market, faces unresolved regulatory issues, and is focusing more on big buybacks than strategic investments or acquisitions.

NVIDIA still faces tough competition from AMD, as well as Intel's new discrete GPU and AI chips from challengers like Graphcore, but it's still a more appealing investment than Qualcomm. Qualcomm remains a stable long-term investment, but it probably won't outperform NVIDIA until it diversifies its business away from the smartphone market and its controversial licensing fees.