Micron (NASDAQ:MU) and Qualcomm (NASDAQ:QCOM) both provide crucial chips for electronic devices. Micron is a leading producer of DRAM and NAND (flash) memory chips, and Qualcomm is the world's largest manufacturer of mobile chipsets and modems for smartphones.

I compared these two stocks a year ago, and declared Qualcomm's better-diversified business made it a better overall investment. Qualcomm's stock advanced about 45% after I wrote that article, but Micron's stock slipped nearly 10%. Let's look back at why Qualcomm outperformed Micron, and if that trend will continue throughout the rest of the year.

Drawing of glowing blue electronic circuits.

Image source: Getty Images.

Micron's cyclical challenges

Micron is the world's third-largest maker of DRAM chips and fourth- largest producer of NAND chips. Samsung (OTC: SSNLF) currently leads both markets. But unlike many of its larger rivals, which own other non-memory businesses, Micron is a "pure play" on the memory market: It generated 66% of its revenue from DRAM chips, 31% from NAND chips, and the rest from other types of memory last quarter.

That business model is a double-edged sword. It amplifies Micron's gains when DRAM and NAND prices are in an upswing, but exacerbates its losses when those cyclical prices decline. Market prices for both types of chips peaked in 2018, then dropped last year due to a supply glut and sluggish demand from PC and smartphone makers.

To make matters worse, Micron stopped selling chips to Huawei, which accounted for 12% of its revenue in 2019, after the U.S. blacklisted the Chinese tech giant amid the escalating trade war. All that pain is clearly reflected in Micron's declining revenue and profits over the past year:

Growth (YOY)

Q3 2019

Q4 2019

Q1 2020

Q2 2020

Q3 2020

Revenue

(39%)

(42%)

(35%)

(18%)

14%

Non-GAAP EPS

(67%)

(84%)

(84%)

(74%)

(22%)

YOY = Year-over-year. Source: Micron quarterly reports.

However, Micron's six-quarter streak of year-over-year revenue declines ended in the third quarter. Its sales to the computer and networking, mobile, and data storage markets all improved and offset its declining sales of embedded chips.

Micron expects its cyclical recovery to continue with 18% to 28% revenue growth and 87% adjusted earnings growth in the fourth quarter. It attributes that growth to stabilizing memory chip prices, robust demand from China's data center market, and remote work measures throughout the pandemic boosting sales of new notebook computers.

Wall Street still expects Micron's revenue and earnings to decline 9% and 56%, respectively, this year. But next year, analysts expect its revenue to rise 11% with 50% earnings growth -- which suggests it passed a cyclical trough in the first half of 2020.

Qualcomm's long-term challenges

Qualcomm's Snapdragon SoCs (system on chips) -- which bundle together a CPU, GPU, and modem -- are the most popular mobile chipsets in the world. Its massive portfolio of wireless patents also grants it a cut of each smartphone sold worldwide.

However, those two growth engines sputtered out last year as smartphone sales stalled out and several top OEMs -- including Apple (NASDAQ:AAPL) and Huawei -- claimed its licensing fees were too high and halted their payments. Qualcomm eventually settled both conflicts with new agreements, but those headwinds temporarily throttled its growth throughout 2019:

Growth (YOY)*

Q3 2019

Q4 2019

Q1 2020

Q2 2020

Q3 2020

Revenue

(13%)

(17%)

5%

7%

0%

EPS

(20%)

(12%)

(18%)

14%

8%

*Non-GAAP. YOY = Year-over-year. Source: Qualcomm quarterly reports.

Qualcomm's growth improved in fiscal 2020, but COVID-19 disruptions curbed its growth in the third quarter, which ended on June 28. Qualcomm was also forced to suspend its chip shipments to Huawei, but it's been lobbying the Trump Administration to overturn that decision.

On a non-GAAP basis, Qualcomm expects its fourth-quarter revenue to rise 15% to 31% year over year with 36% to 60% earnings growth, even after factoring in the pandemic's ongoing effects on smartphone shipments. Qualcomm attributes that growth to the upcoming launches of new 5G handsets -- many of which will use its mobile SoCs, baseband modems, and RF front-end chips.

Wall Street expects Qualcomm's revenue and earnings to rise 9% and 11%, respectively, this year. But next year, analysts expect its revenue and earnings to surge 32% and 63%, respectively, thanks to new 5G devices and easy comparisons to 2020. Those forecasts also indicate Qualcomm is poised for a sharp cyclical rebound.

The valuations and verdict

Micron's and Qualcomm's stocks are both cheap relative to their growth potential. Micron trades at just nine times forward earnings, while Qualcomm has a forward price-to-earnings (P/E) ratio of 18. However, Qualcomm remains the better buy for three simple reasons: It's better diversified, it dominates its core market, and it pays a healthy forward dividend yield of 2.3%.

Micron is still a solid company, but it faces tougher competition from larger companies, it's highly exposed to cyclical memory prices, and it won't pay investors any dividends for waiting out the storm.