NXP Semiconductors (NASDAQ:NXPI) and Intel (NASDAQ:INTC) are two of the world's largest chipmakers. NXP is the market leader in automotive, secure identification, and digital networking chips, while Intel is the top producer of x86 CPUs for PCs and data centers.
I compared these two chipmakers last July, and declared NXP the better buy. I noted NXP wasn't struggling with operational issues like Intel's chip shortage, its end markets were gradually stabilizing, and it would benefit from its takeover of Marvell's Wi-Fi and Bluetooth assets.
NXP's stock has risen about 5% since I wrote that article, while Intel's stock has declined roughly 15%. Let's see why NXP remained stable as Intel lost its momentum, and whether or not the European chipmaker will continue to outperform its American peer throughout the rest of the year.
The key differences between NXP and Intel
NXP generated 47% of its revenue from automotive chips last year. Another 21% came from communications infrastructure chips, 18% came from industrial and Internet of Things (IoT) chips, and 13% came from mobile chips.
Intel generated 52% of its revenue from PC chips last year. Data center chips accounted for another 33%, while the rest was split between IoT chips, memory chips, programmable chips, and Mobileye's automotive chips and ADAS (advanced driver-assistance systems).
NXP and Intel both traditionally manufacture most of their chips with in-house foundries. However, both companies also have manufacturing relationships with TSMC (NYSE:TSM), the world's largest and most advanced contract chipmaker.
NXP owns a joint venture fab with TSMC in Singapore, and it's using TSMC's 5nm process for its newest automotive chips. Intel will reportedly outsource the production of its new Ponte Vecchio GPUs to TSMC, but it's still manufacturing its PC and data center CPUs at its own foundries.
Different markets, different challenges
The COVID-19 pandemic impacted many of NXP's top customers, but its automotive unit struggled the most as automakers stopped producing new vehicles.
In the first half of 2020, NXP's automotive revenue plunged 19% year-over-year. Its communication infrastructure and other revenue also fell 10% as carriers suspended their upgrades, and its mobile revenue dropped 7% as smartphone sales slipped and the unit divested its voice and audio businesses. Those declines offset the 7% growth of its industrial and IoT business, and its total revenue declined 11% from a year ago.
NXP expects its auto, industrial and IoT, and mobile revenue to rise sequentially in the third quarter as businesses come back online, but it still expects its communication and infrastructure business to remain weak.
At first glance, Intel was seemingly well-insulated from the COVID-19 crisis, as remote work boosted demand for new PCs and data center upgrades.
In the first half of 2020, Intel's client computing revenue rose 11% year-over-year as it gradually overcame its chip shortage, and its data center group revenue surged 43%. The growth of those two core businesses offset its declining IoT, memory chip, and Mobileye revenue, and boosted its total revenue 21% year-over-year.
However, Intel is still ceding the PC market to AMD (NASDAQ:AMD), which capitalized on its rival's chip shortage by launching new Ryzen CPUs. AMD didn't suffer any production bottlenecks because it's a "fabless" chipmaker that outsources all its newest chips to TSMC. Last quarter, Intel admitted its 7nm chips were trailing about a year behind its internal target -- which indicates it will fall further behind TSMC (and its client AMD) in the ongoing "process race" to create smaller and more powerful chips.
The near-term outlooks
Wall Street expects NXP's revenue and earnings to decline 10% and 36%, respectively, this year, as the COVID-19 crisis throttles its growth. But in 2021, analysts expect NXP's revenue and earnings to rise 14% and 42%, respectively, as its main end markets recover.
During last quarter's conference call, NXP CEO Kurt Sievers declared the company would remain "laser focused on what we can control" in terms of maintaining its supply chains and controlling its expenses.
Analysts expect Intel's revenue to grow 4% this year as it earnings dip 1%. It doesn't expect its momentum in the first half of the year, which was mainly driven by a pandemic-induced spike in PC sales and data center cloud upgrades, to continue in the second half of the year.
During Intel's latest conference call, CFO George Davis warned that a "weaker global GDP" in the aftermath of COVID-19 would also impact its results. Looking ahead into next year, analysts expect Intel's revenue and earnings to decline 2% and 3%, respectively, which suggests its execution issues will continue.
The valuations and verdict
NXP trades at 27 times forward earnings and pays a forward dividend yield of 1.2%. Intel trades at just 11 times forward earnings and pays a much higher forward yield of 2.7%. Intel's lower valuation and higher yield might attract value-seeking income investors, but it's cheaper for obvious reasons.
NXP doesn't face the same operational challenges as Intel, it doesn't face an aggressive direct competitor like AMD, and it expects most of its core markets to generate sequential growth -- which indicates it's passing a cyclical trough. Therefore, I still believe NXP will outperform Intel for the foreseeable future.