Intel (INTC -2.99%) and Qualcomm (QCOM -2.26%) are two of the world's most important chipmakers. Intel is the largest manufacturer of x86 CPUs for PCs and servers, while Qualcomm is one of the top suppliers of mobile chips and baseband modems for smartphones.

Yet Intel's stock price declined about 30% this year as sales of new PCs cooled off in a post-lockdown world. Qualcomm stock also shed more than 20% of its value as investors fretted over the slowing growth of the smartphone market. Rising interest rates exacerbated that pain by driving investors away from tech stocks and toward more conservative investments.

A child draws buy and sell arrows on a blackboard.

Image source: Getty Images.

Should investors consider buying either of these out-of-favor chipmakers as the bulls look the other way? Let's review their near-term challenges, long-term opportunities, and valuations to decide.

Intel faces tough near-term headwinds

Over the past several years, Intel struggled with R&D blunders, product delays, chip shortages, and jarring CEO changes. All that instability caused Intel's first-party foundries to gradually fall behind Taiwan Semiconductor Manufacturing (TSM -3.18%) in the so-called "process race" to manufacture smaller and denser chips.

As a result, Advanced Micro Devices (AMD -3.77%), which outsourced its top-tier chips to TSMC's foundries, pulled ahead of Intel with more advanced chips. AMD's stable chip supply and lower prices also enabled to it gain ground against Intel. Between the third quarters of 2016 and 2022, Intel's share of the CPU market fell from 82.5% to 64.2%, according to PassMark Software.

Intel once considered going "fabless" like AMD, but CEO Pat Gelsinger -- who took the helm last February -- doubled down on expanding its plants to catch up to TSMC instead. Gelsinger expects that aggressive expansion, along with the recently passed CHIPS Act, to help it catch up to TSMC by 2025.

But until that happens, investors need to brace for many more quarters of sluggish growth and higher expenses. Intel's adjusted revenue, which excludes the ongoing divestment of its NAND chip business, rose 2% to $74.7 billion in 2021. But this year, it expects its revenue to decline 9% to 13%, its adjusted gross margin to slide from 57.7% to 49%, and for its adjusted earnings per share (EPS) to plunge by 58%.

Intel mainly blames that slowdown on weak sales of consumer PCs, which should persist throughout the rest of the year, as well as sluggish sales of data center chips amid the current macroeconomic headwinds. But other challenges -- including new Arm-based server chips, delays across its roadmap, and Apple's decision to fully replace Intel's chips with its own silicon -- are causing even more headaches.

Qualcomm faces another cyclical slowdown

Qualcomm also dealt with several existential challenges in recent years. It quelled a revolt from OEMs that refused to pay its wireless licensing fees, it was fined by regulators for using anticompetitive tactics, and it narrowly fended off a hostile takeover attempt by Broadcom as it failed to buy NXP on its own. It also lost its crown as the world's top mobile chipmaker to MediaTek over the past two years, although it remains the market leader in premium smartphones.

But over the past year, Qualcomm moved past most of those issues and focused on three priorities instead: preserving its lead in the high-end market with new Snapdragon SoCs (system on chips), reducing its dependence on the smartphone market by selling more chips for connected vehicles and Internet of Things (IoT) devices, and generating healthy cash flows for its buybacks and dividends.

Qualcomm is a fabless chipmaker, which outsources most of its production to TSMC and Samsung, so it isn't struggling with any major chip shortages or costly plant upgrades. But that also means it won't benefit from the CHIPS Act, which provides hefty subsidies to first-party manufacturers like Intel.

Qualcomm's adjusted revenue rose 55% to $33.5 billion in fiscal 2021, which ended last September, as its EPS more than doubled. For fiscal 2022, it expects its revenue to increase 31% to 33% and for its EPS to grow 45% to 49%. Those growth rates are dazzling, but it's bracing for slower growth next year as the smartphone market faces another cyclical slowdown. That's why analysts expect Qualcomm's revenue and adjusted EPS to increase just 6% and 5%, respectively, in fiscal 2023.

The valuations and verdict

Intel stock trades at just 11 times forward earnings and pays a forward yield of 3.6% -- but that dividend could be reduced as it ramps up its spending on new plants. Qualcomm also trades at 11 times forward earnings, but it pays a lower forward dividend yield of 2.1%.

Both stocks look cheap, but they're trading at discounts for obvious reasons. Intel's investors see sluggish PC and data center chip sales ahead as it desperately chases TSMC in the costly process race, while Qualcomm's investors are getting ready for slower smartphone sales.

I wouldn't rush to buy either of these chip stocks right now, but Qualcomm is clearly a better pick than Intel for three simple reasons: its business is less capital intensive, it faces fewer competitive threats, and it doesn't need to pull off a painful multiyear turnaround to remain relevant.