Sales in the semiconductor industry are surging thanks to the secular trends of artificial intelligence (AI) and electric vehicles (EVs). The semiconductor market is forecast to reach more than $600 billion in 2024, and rise to $1 trillion by 2030, making investments in chip companies a good way to capitalize on this growth.
Two semiconductor industry leaders to consider are Wolfspeed (WOLF +0.00%) and Nvidia (NVDA +1.16%). The former commands over 50% market share in the silicon carbide (SiC) wafer sector, while the latter captured headlines as its stock soared over 170% in 2024, through the week ending Dec. 13, thanks to its leadership in AI semiconductors.
Both offer innovative technologies that make them attractive investments. Let's examine Wolfspeed and Nvidia to help you assess which is the better semiconductor stock for the long haul.
A look at Wolfspeed
NYSE: WOLF
Key Data Points
What makes Wolfspeed a compelling investment is its focus on silicon carbide (SiC). The company developed the first commercial SiC wafers in 1991. They offer many advantages over the silicon widely used in the semiconductor industry today, particularly for EVs. Silicon carbide enables EVs to travel longer distances and reduce charging time.
Wolfspeed believes its SiC sales will eventually grow to $3 billion in annual revenue as the EV market expands. For comparison, in the company's 2024 fiscal year, ended June 30, sales were $807.2 million.
SiC's potential sounds promising, but the company has several hurdles to overcome first. It is trying to ramp up production at its SiC manufacturing plants, but the costs are high.
For example, it generated sales of $194.7 million in its fiscal first quarter, ended Sept. 29, but the cost of revenue was $230.9 million. As a result, gross profit of $77.4 million at the end of fiscal 2024 turned into a loss of $36.2 million in the first quarter.
It's also facing a cyclical downturn, causing softness in sales. Its $194.7 million in first-quarter revenue was down from $197.4 million in the previous year. The drop in sales, lack of profitability, and high production costs contributed to the resignation of Wolfspeed's CEO in November.
Nvidia's AI strengths
NASDAQ: NVDA
Key Data Points
With the rise of AI, Nvidia has turned into a semiconductor powerhouse. It is now the world's leading semiconductor company by market cap.
CEO Jensen Huang anticipated the need for accelerated computing in 1999 and introduced the graphics processing unit (GPU). Accelerated computing uses a dedicated processor to tackle intense tasks, such as the data crunching done by AI systems, rather than rely on a single CPU to do it all.
This pioneering work in GPUs set the company up to enjoy massive sales to the cloud computing industry, where AI systems are housed. In its fiscal third quarter, ended Oct. 27, Nvidia's revenue reached a record $35.1 billion, an impressive 94% increase year over year. This led to a quarterly gross profit of $26.2 billion, nearly double the prior year's $13.4 billion.
Nvidia's AI products are just getting started. The company is rolling out its latest computing architecture, called Blackwell. The new platform "pushes the boundaries of scientific computing," according to management.
It will be a key revenue driver. Huang said current systems were trained on the human-generated data that existed before AI. Now, AI is starting to learn from its own synthetically produced content.
This requires more computing power, which Blackwell delivers. "And so, we're seeing a lot of demand coming from a lot of different places," Huang said, indicating customers continue to crave his company's products for AI.
Choosing between Wolfspeed and Nvidia
Between Wolfspeed and Nvidia, the latter's strong sales, robust profits, and the ongoing demand seem to make it the clear choice between these two semiconductor giants. However, stock valuation is another important consideration.
Comparing Wolfspeed and Nvidia using the price-to-sales ratio (P/S), a metric measuring how much investors are willing to pay for every dollar of sales, is revealing.
Data by YCharts.
Wolfspeed's recent struggles have resulted in its stock dropping over 80% this year through Dec. 13. Consequently, its P/S is the lowest it's been in years, while Nvidia's has done the opposite thanks to its AI success.
Hence, Wolfspeed stock emerges as the better value, and could potentially deliver more upside over the long run, if the company can rebound from its current challenges. But because it faces a number of near-term headwinds, only investors with a high risk tolerance should consider purchasing shares.
For others, Nvidia's success to date and the opportunities for continued sales growth with Blackwell make it the better long-term investment in the semiconductor sector.
