Nvidia (NVDA 6.18%) and Wolfspeed (WOLF 5.55%) are both chipmakers that carved out high-growth niches with their unique business strategies. Nvidia is the world's largest producer of discrete graphics processing units (GPUs) for high-end video games and data centers. Its data center business has grown like a weed over the past few years as more organizations upgraded their servers to process advanced machine learning and artificial intelligence (AI) tasks.
Wolfspeed, formerly known as Cree, develops wide-bandgap (WBG) semiconductors made from silicon carbide and gallium nitride -- which can operate at higher voltages, temperatures, and frequencies than traditional silicon chips. The resilience and energy efficiency of its WBG chips make them well suited for short-length LEDs, lasers, military radars, and 5G base stations. Wolfspeed also sells silicon carbide materials to electric vehicle (EV) makers for the production of batteries and powertrains.
Image source: Getty Images.
But over the past five years, Nvidia generated a whopping gain of more than 1,000% for its investors. Wolfspeed's stock declined 3% during that period as the benchmark Philadelphia Semiconductor Index advanced about 150%. Will Nvidia continue to outperform most of its industry peers, or is it finally time for Wolfspeed to shine?
The bull and bear case for Nvidia
Nvidia's growth accelerated significantly during the pandemic as people bought new PCs for online classes, remote work, and high-end gaming. Its sales of data center GPUs also soared as more companies upgraded their servers to cope with the high usage of cloud-based services and the need to crunch all that data with AI algorithms. Its acquisition of the data center networking company Mellanox in April 2020 also expanded its data center business and inorganically boosted its sales.
As a result, Nvidia's revenue rose 53% in fiscal 2021 (which ended in Jan. 2021) and 61% in fiscal 2022. Its adjusted earnings per share (EPS) grew 73% in fiscal 2021 and 78% in fiscal 2022.
But in fiscal 2023, its revenue stayed nearly flat as its adjusted EPS dropped 25%. That abrupt slowdown was caused by difficult comparisons to the pandemic, plummeting sales of new PCs, and intense macro headwinds for data center operators. At the time, analysts expected that slowdown to continue throughout fiscal 2024.
However, the rise of generative AI platforms like ChatGPT and DALL-E over the past year flipped that bearish thesis on its head. That sudden paradigm shift sparked a buying frenzy in Nvidia's top-tier data center GPUs, and analysts now expect its revenue and adjusted EPS to increase 59% and 113%, respectively, for the full year.
The bulls believe the AI boom prematurely halted Nvidia's cyclical downturn and will kick off a new multiyear growth cycle. The bears believe the bulls are counting their eggs before they hatch, and they'll note that a lot of that growth has already been priced into its shares at 55 times forward earnings and 23 times this year's sales.
The bull and bear cases for Wolfspeed
Wolfspeed's growth cooled off during the pandemic as the crisis disrupted its supply chains and curbed the expansion of China's EV market. That's why its revenue declined 16% in fiscal 2020 (which ended in June 2020). In fiscal 2021, its revenue rose 12% as its automotive and radio frequency (RF) chip markets gradually stabilized.
In fiscal 2022, its revenue grew 42% as the auto, industrial, and energy markets experienced post-pandemic recoveries. It expects its revenue to rise between 20% and 23% in fiscal 2023 -- even though it still faces tough macro headwinds -- as it starts recognizing revenues from its newly opened Mohawk Valley fab in upstate New York in the second half of the year.
That new fab is the world's largest 200 mm silicon carbide plant, and Wolfspeed believes it will reach a 20% capacity utilization rate by the end of fiscal 2024. Over the long term, it expects that rate to continue climbing as silicon carbide chips gradually replace traditional silicon chips, and it expects the expansion of the new fab's 200 mm chipmaking technologies to reduce its overall die cost by more than 50%.
Those rising gross margins, along with its recent divestments and other cost-cutting measures, could help it eventually turn a profit. But for now, analysts expect it to stay unprofitable on a generally accepted accounting principles (GAAP) basis through at least 2025.
The bulls will argue that Wolfspeed's first-mover advantage in the silicon carbide space could make it a great long-term investment and that its stock isn't too expensive at eight times this year's sales. The bears believe Wolfspeed will struggle to narrow its losses as it ramps up its production of 200 mm chips and that other larger chipmakers -- most notably ON Semiconductor and STMicroelectronics -- are also gradually creeping into the silicon carbide market.
The better buy: Nvidia stock
Nvidia's stock is pricey, but it's easy to see why it deserves a premium valuation. Wolfspeed could continue to expand over the next few years, but it faces tougher competitive headwinds than Nvidia and doesn't have a clear path toward profitability. I wouldn't rush to buy either of these semiconductor stocks right now, but it certainly seems like Nvidia will continue outperforming Wolfspeed for the foreseeable future.
