The PHLX Semiconductor Sector index has seen a solid recovery since the beginning of July, gaining over 23% in value as investors have ignored the gloomy environment surrounding the semiconductor industry.

Nvidia (NVDA 4.00%) and Qualcomm (QCOM 3.36%) investors have benefited big time from the rally in semiconductor stocks. While shares of Nvidia are up 17% since July 1, Qualcomm stock has appreciated 15.8%. However, a closer look at the recent financial performance of both companies will tell us that one of them may have gotten ahead of itself on the stock market and may face tough times ahead.

Let's see which one would be a better semiconductor bet for investors right now.

Nvidia stock is firing on all cylinders, but there is a massive concern

Though Nvidia stock has gained impressively amid the broader market rally in recent weeks, investors have reasons to be worried about the company's future, at least in the near term. That's because Nvidia issued a dire warning when it released preliminary results for the second quarter of fiscal 2023 (three months ending July 31) on Aug. 8.

The preliminary results make it clear that Nvidia has lost steam. The company recorded just 3% year-over-year revenue growth last quarter to $6.7 billion, missing its original estimate of $8.1 billion by a huge margin. The weakness in the gaming business is to blame for this terrible showing. Nvidia says that its gaming revenue shrunk 33% over the prior year because of "lower sell-in of gaming products reflecting a reduction in channel partner sales likely due to macroeconomic headwinds."

The bad news is that sales of graphics cards are expected to crash. DigiTimes estimates that graphics card shipments could drop between 40% and 50% this year, driven by a drop in sales of personal computers (PCs). This could turn out to be Nvidia's worst nightmare, as the gaming segment produced $2.04 billion in revenue last quarter, which was just over 30% of the company's top line.

Nvidia took a $1.32 billion charge as it adjusted inventories and lowered the prices of its graphics cards to reflect reduced demand. Not surprisingly, Nvidia now expects a fiscal Q2 adjusted gross margin of 46.1%, compared to the prior expectation of 67.1%. As a result, investors can expect Nvidia's bottom line to take a hit.

And, as the situation in the graphics card market could get worse thanks to the contraction in the PC market as well as other factors such as high inflation, the wheels could come off Nvidia's latest stock market rally.

Qualcomm is delivering the goods despite the smartphone market's weakness

Qualcomm has remained unaffected by a tepid smartphone market this year. Canalys reports that global smartphone shipments were down 11% year-over-year in the first quarter of 2022, followed by a 9% drop in Q2. Smartphone demand has taken a hit this year amid macroeconomic uncertainty and inflation, but all that hasn't kept Qualcomm from delivering impressive growth.

The chipmaker's fiscal 2022 third-quarter revenue (for the three months ending June 26, 2022) was up 37% year-over-year to $10.9 billion. Qualcomm generated $7.2 billion in sales from chips used in smartphones (application processors and radio-frequency front-end modules), an increase of 49% over the prior-year period.

The company expects 50% revenue growth in sales of its handset chips this year. Qualcomm is confident of achieving this growth thanks to an increase in the semiconductor content it is supplying to each smartphone. The company also sees an increase in its addressable market on account of a stronger reach in premium smartphones.

Meanwhile, the Internet of Things (IoT) and the automotive markets are also stepping up for Qualcomm. The company's automotive revenue was up 38% year-over-year last quarter to $350 million. While this accounted for only a small portion of the company's total revenue, it is worth noting that Qualcomm has a design win pipeline worth $19 billion in the automotive space.

In simpler words, Qualcomm's automotive chips have been selected for use by major automakers and component suppliers across the globe. Once those designs move into production, Qualcomm's automotive business should ideally get much bigger given the massive pipeline.

The IoT business is another key growth driver for Qualcomm, as this segment generated $1.8 billion in revenue last quarter, an increase of 31% over the prior year. The chipmaker could sustain its impressive IoT growth in the long run, as the demand for chips used in this business is expected to grow rapidly in the coming years, and customers are turning to Qualcomm's solutions to power their IoT applications in different categories.

The verdict

The valuation is going to make it easy to choose one of these semiconductor stocks.

Nvidia is trading at 50 times trailing earnings, which is quite expensive given the slowdown that the company now faces. The forward earnings multiple of 51 indicates that its bottom line could contract over the next year. Qualcomm, meanwhile, is quite attractive at just 13 times trailing earnings and 11 times forward earnings.

Qualcomm's price-to-sales ratio of four also represents a significant discount from Nvidia's multiple of 16. As such, investors can buy into Qualcomm's impressive growth at an attractive valuation, which is not the case with Nvidia. That's why investors looking to buy a semiconductor stock right now might want to consider choosing Qualcomm over Nvidia since it offers more bang for the buck and is growing impressively thanks to multiple tailwinds.