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Better Buy: Nvidia Corporation or NXP Semiconductors NV?

By Leo Sun – Mar 10, 2016 at 1:24AM

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Which chipmaker looks like the smarter long-term play at current prices?

Chipmakers Nvidia (NVDA -1.51%) and NXP Semiconductors (NXPI -3.02%) aren't considered direct competitors, but they both rely on a few overlapping markets. Nvidia, which makes high-end graphics cards and mobile processors, has recently been expanding into new markets like data centers, on-board computers for drones, and car infotainment systems.

NXP is the world's top supplier of semiconductors for the security, automotive, and digital networking industries. Last December, NXP closed its acquisition of Freescale to become the world's biggest manufacturer of automotive electronics.

NXP's wafer and chips. Image source: NXP.

But over the past 12 months, Nvidia rallied 48% while NXP slumped 12%. Let's discuss why the market seems to favor Nvidia over NXP, and whether that trend will continue this year.

Top-line comparisons
Nvidia's sales rose 12% annually to $1.4 billion last quarter, beating estimates by $90 million. GPU revenue grew 10% to $1.18 billion, thanks to 21% sales growth in gaming GPUs, 7% growth in Quadro workstation GPUs, and 10% growth in Tesla/GRID (server/cloud) GPUs.

Nvidia's gaming GPU sales were supported by upgrades for gaming PCs, which have been insulated from the slowdown in the PC market. The company also launched a new VR dev kit to capitalize on the growing demand for VR games. Tesla sales were supported by the launch of a new hyperscale datacenter "deep learning" platform that helped web-based companies accelerate AI workloads.

The Tesla-powered Big Sur AI platform. Source: Company website.

NXP's sales rose 4.5% annually to $1.6 billion last quarter, beating expectations by $300 million. However, that total included a month of Freescale's revenue, which wasn't included in most analyst estimates. On average, analysts had expected NXP's stand-alone revenue to fall 15% during the fourth quarter. It's hard to tell if NXP would have beat those estimates, since it didn't report NXP's revenue excluding Freescale's sales.

During the quarter, NXP's automotive sales rose 45% annually and accounted for 26% of its sales. NXP expects that percentage to rise to 36% during the first quarter. Sales of secure identification and secure device solutions grew by the single digits, but sales of secure interface/infrastructure and standard products declined. NXP had previously expected sales to fall across all five segments.

Bottom-line comparisons
Last quarter, Nvidia's non-GAAP net income rose 23% annually to $297 million, or $0.52 per share, which beat estimates by $0.20. Non-GAAP gross margin rose from 56.2% in the prior year quarter to 57.2%, while operating expenses only rose 6%.

Looking ahead, analysts expect Nvidia's GAAP-adjusted annual earnings to grow at an average rate of just 6% over the next five years, which gives it a PEG ratio of 4. Since a PEG ratio under 1 is considered cheap, Nvidia stock is trading at a premium to its earnings growth potential. Last year, Nvidia spent $800 million on dividends and share buybacks, and plans to allocate $1 billion for the same purposes this year. Nvidia currently pays a forward annual dividend yield of 1.5%.

Last quarter, NXP's non-GAAP net income -- which includes Freescale's earnings but excludes the sale of its RF Power and Bipolar businesses -- grew 4.3% annually to $341 million, or $1.25 per share. Analysts had expected much lower earnings of $1.07, but that estimate again excludes Freescale's earnings. Non-GAAP gross margin rose from 46.6% a year earlier to 50.2%, but operating expenses more than doubled due to higher R&D and SG&A costs.

Analysts expect NXP's GAAP earnings to grow 25% annually over the next five years, which gives it a very low PEG ratio of just 0.5. In 2015, NXP spent $474 million on buybacks, but hasn't revealed how its increased debt load (now at 2.7 times EBITDA) from its $12 billion purchase of Freescale will impact that program. NXP doesn't pay a dividend, and hasn't discussed plans to do so in the future.

An Nvidia-powered connected Audi. Image source: Nvidia.

The verdict
Both Nvidia and NXP will likely profit from the growth of connected cars, an industry that PWC estimates could be worth 113 billion euros ($123 billion) by 2020. But both companies can profit from the market in different ways, with Nvidia supplying application processors for infotainment and autonomous systems, and NXP supplying other automotive semiconductors.

However, Nvidia's big rally over the past year clearly inflated its valuations, while NXP's valuations have become too cheap to ignore. With a forward P/E of 10 and a PEG ratio of 0.5, the "new" NXP looks like it has more upside than Nvidia at current prices.

Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends NXP Semiconductors. The Motley Fool recommends Nvidia. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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