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Better Buy: Intel Corporation vs. Qualcomm

By Dan Caplinger - Mar 6, 2016 at 9:54AM

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Both of these chipmakers have faced their struggles, but many remain optimistic about their long-term futures. Which looks more promising?

Chipmakers Intel (INTC 0.82%) and Qualcomm (QCOM 0.98%) have shared the limelight over the past couple of decades, with Intel driving the PC revolution forward and Qualcomm taking over on the mobile-chip front. Lately, though, both companies have seen their stocks slide, and many tech investors want to know which has the better prospects for profits. Let's take a look at how Intel and Qualcomm compare on some key metrics to see which deserves your attention right now.

Both Qualcomm and Intel have seen their shares lose ground over the past year, but Qualcomm's drop has been more severe. Intel is down 8% since early 2015, but Qualcomm has posted a much larger 26% decline.

Even with Qualcomm's declines, its stock still looks like the more expensive of the two when you use a simple valuation method based on trailing earnings. Qualcomm's current trailing earnings multiple is 17, while Intel trades at just 12 times its trailing earnings. However, when you bring in anticipated growth, the two stocks look much more similar. Both stocks carry a multiple based on forward earnings of around 11, and that shows the extent to which Qualcomm investors expect the chipmaker to see its earnings rise at a greater pace than Intel's followers do. On a valuation basis, Intel and Qualcomm look relatively similar.

For dividend investors, a glance at Intel and Qualcomm shows comparable figures. Qualcomm has a slight edge on dividend yield, featuring a 3.7% yield right now. But Intel isn't far behind at 3.5%.

A comparison of the payout ratios of the two stocks weighs in Intel's favor. Intel currently pays just 40% of its earnings to investors in the form of dividends, compared to a higher 60% payout ratio for Qualcomm. Again, though, if Qualcomm's earnings are expected to rise substantially in the next year, then it would bring the payout ratio down in a way that would be more in line with Intel.

Both stocks also have a long history of raising their payouts regularly, but Qualcomm has been more aggressive recently, nearly doubling its dividend just since early 2013. Intel has been more measured in its increases lately, and it kept its payout steady between mid-2012 and late 2014 in recognition of tough conditions in what has historically been its core PC market. Here too, Qualcomm and Intel look relatively similar, although some would give Qualcomm more credit for its more recent upward push on the dividend front.

Future growth prospects are where Intel and Qualcomm face the greatest uncertainty. Intel's most recent report in January showed modest 1% gains in revenue year over year, and its Data Center business was able to offset small declines in its key Client Computing group. Looking forward, Intel sees its sales rising by mid-to-upper single-digit percentages in 2016, and the recent acquisition of Altera should represent a substantial portion of those gains. Intel is boosting its capital spending by 30%, and the $9.5 billion it's dedicating toward internal investment could help ramp-up long-term growth efforts. As the PC market wanes, Intel will rely on the Internet of Things and data-center servers for its key growth centers going forward.

By contrast, Qualcomm's larger share-price declines have stemmed from deteriorating performance on its financials. In its most recent quarter, Qualcomm's revenue plunged 19%, and adjusted net income fell by almost 25%. Shipments of MSM chips fell 10%, and although weakness in the semiconductor business was generally expected, corresponding double-digit percentage declines in licensing revenue came as a departure from past quarters. Looking forward, Qualcomm expects further massive declines in earnings and revenue in its fiscal second quarter, and that could prevent a turnaround from taking shape until much later in the year.

Intel and Qualcomm are both dealing with tough times, but Intel appears to be further along the process of figuring out a solution. Given enough time, Qualcomm might be able to emerge with a solid long-term growth strategy. For now, though, Intel looks like the more solid pick for those looking for stability and predictability.

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Stocks Mentioned

Intel Corporation Stock Quote
Intel Corporation
$36.99 (0.82%) $0.30
QUALCOMM Incorporated Stock Quote
QUALCOMM Incorporated
$127.06 (0.98%) $1.23

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