The Nasdaq Composite index's level is down roughly 25% year to date, and many semiconductor stocks have seen huge sell-offs across 2022's trading. In addition to concerns about the possibility of a prolonged recession and other macroeconomic pressure affecting the broader market, manufacturing issues and geopolitical risk factors have also caused investors to move out of semiconductor stocks.
Nvidia (INTC +5.51%) and Intel (NVDA 0.22%) are leading chip companies that have seen big sell-offs, and their stocks now trade down roughly 40% and 53% this year, respectively. Which of these semiconductor players is the better buy amid today's bear market conditions? Read on for differing takes from two Motley Fool contributors.
Image source: Getty Images.
Nvidia has proven its ability to innovate
Parkev Tatevosian: A proven ability to innovate is one of the factors I rank highly when considering investing in a technology company. That means more than developing just one excellent product or service. Nvidia has arguably proven its innovative capabilities by repeatedly improving its graphic processing units (GPUs). These highly desired computer chips power many of today's gaming devices, servers, and cockpit displays in cars.
Robust customer demand has propelled Nvidia's revenue from $4.1 billion in 2014 to $26.9 billion in its most recently completed year. Of course, sales boomed after the pandemic's onset as people invested in home offices and gamed more often, and digitally native companies needed more server capacity. Nvidia capitalized on the shift in consumer behavior, selling its GPUs at premium prices, and generating a gross profit margin of over 62% for three consecutive years.
Indeed, Nvidia's difficult-to-replicate products have allowed the company to increase earnings per share at a compounded annual rate of 32.3% in the last 10 years. Admittedly, Nvidia faces near-term headwinds as economies have reopened and consumer behavior has rapidly changed again. Moreover, sales of Nvidia's chips are strongly correlated to the prices of cryptocurrencies because they can help individuals earn digital assets.
Those two red flags for Nvidia might slow sales and profits over the next few quarters. Still, long-term investors could take that as an opportunity to scoop up shares of this proven innovator at lower prices.
Intel could be the safer stock in today's turbulent market
Keith Noonan: Intel has been struggling due to weak demand and margins and competition from Advanced Micro Devices in its core central processing unit and server product categories. The company's second-quarter performance was admittedly quite disappointing, with non-GAAP (adjusted) revenue falling 17% year over year to $15.3 billion and adjusted earnings per share falling 79%. At the same time, Chipzilla hardly has a growth-dependent valuation, and its stock trades at just 13.5 times this year's expected earnings.
Intel also pays a sizable dividend, with its current yield sitting at roughly 4.7%. Whether or not the company should eventually cut its payout and focus resources on growth initiatives is a question that investors seem to be split on, but its ability to support the payout has improved thanks to funding and financing options stemming from the recently passed CHIPS and Science Act. The stock's big yield could provide some buffer in the near term if volatility continues to roil the broader market.
NASDAQ: INTC
Key Data Points
Intel is gearing up to improve its competitive position in key categories, and its move to secure early access to ASML Holding's next-generation semiconductor manufacturing machines could suggest that it has some promising chip designs that will help it start to mount a comeback in the next few years.
Chipzilla's product pipeline looks weaker than Nvidia's, and its recent business slowdown is more dramatic, but Nvidia also still trades at roughly 41 times this year's expected earnings and 12.6 times expected sales even after big sell-offs. Intel's more conservative valuation and turnaround potential could make it the better buy in today's market.
Which semiconductor stock is the better buy?
Nvidia's strengths in high-performance GPUs and chips that can be used for data centers, artificial intelligence, machine vision, and other applications have helped it grow at a rapid clip and generate superior margins in recent years. The company's position in the overall semiconductor industry looks stronger than Intel's, and Nvidia is probably the better stock for growth-oriented investors.
But if you're worried that the current Nasdaq bear market may last for a while, Nvidia could have further to fall from current valuation levels, and Intel could be the better buy. For investors who would rather invest in more conservatively valued companies with turnaround potential, Intel is probably the better portfolio fit. This is a case in which choosing between the stocks should come down to your personal appetite for risk and assessment of the relationship between each company's respective valuation and growth outlook.
