While both Intel (NASDAQ:INTC) and NXP Semiconductors (NASDAQ:NXPI) design and manufacture chips, the two companies are set on very different paths. Intel remains heavily dependent on the PC market, which is suffering from a prolonged slump. The company's server chips have been picking up the slack, but execution issues in other areas have caused major problems. Intel has essentially given up on the smartphone market, and it's at risk of losing its edge in manufacturing to third-party foundries.

NXP sells a broad set of semiconductor products, ranging from NFC chips that enable mobile payment systems to a wide array of sensors. But following the company's acquisition of Freescale Semiconductor, NXP is now more heavily invested in the automotive market. The company is the largest automotive semiconductor vendor, and with cars becoming smarter and more connected, the market has plenty of room to grow in the coming years.

With Intel working to diversify beyond PCs and NXP betting big on the connected, autonomous car of the future, which stock is the better buy for investors?

The case for Intel

Image source: Intel.

Intel still produces plenty of profits despite slumping PC sales and its failure in the mobile market. The company earned $11.4 billion of net income on $55.4 billion of sales in 2015, down only slightly compared to 2014. The client computing group suffered a 7.6% decline in revenue and a 20.9% decline in operating income, but a jump in data center sales, along with a favorable tax rate, helped offset much of that weakness.

Intel offered investors a look at its new strategy in April, and PCs are no longer the focal point. The number one priority for Intel is the cloud, an area where the company is dominant. Intel's Xeon server processors have a near-monopoly in the server chip market, with cloud computing companies like Amazon and Microsoft having no real alternative. It's no wonder, then, that Intel's data center group generates operating margins close to 50%.

Intel's second priority is connected things, including PCs. Intel views autonomous vehicles, industrial, and retail as its key markets in this area. Intel will be competing with ARM chips, just as it did in the mobile market, so the company's focus on a few areas where it can differentiate its products is likely the right move.

Memory and programmable solutions are the third priority for Intel. 3D XPoint memory could potentially upend the memory market if it provides the promised performance at the right price, and Intel's acquisition of FPGA supplier Altera gives the company more products to sell into the data center. Intel is trying to move beyond providing only processors, increasing its share of total data center spending. Connectivity, namely 5G, and continuing to push transistor dimensions lower are the last two priorities for Intel.

With PCs becoming less important for Intel, the company faces the challenge of maintaining the kind of profitability it's accustomed to while competing with ARM chip vendors using third-party foundries that are no longer at a massive disadvantage. I suspect the coming years will be rocky for Intel as it begins to execute this new strategy. Only time will tell whether it succeeds.

The case for NXP Semiconductors

Image source: NXP Semiconductors.

NXP isn't all that dependent on either the PC or smartphone markets, but it's still subject to the ups and downs of the semiconductor market as a whole. While its merger with Freescale added significant revenue, sales were down 11% year over year during the first quarter on a comparable basis. The company's non-GAAP operating margin also contracted, falling 2.9 percentage points year over year to 23.3%. Non-GAAP EPS slumped 15.6% year over year because of an increase in the number of outstanding shares as a result of the Freescale merger.

Despite the near-term difficulties facing the company, NXP is well positioned to benefit from the growing quantity of semiconductor products finding their way into the automobile. Automotive revenue accounted for 36% of NXP's revenue during the first quarter, up from 21% during the prior-year period, and the company's potential sale of its standard products business could raise that percentage further.

In May, NXP announced its BlueBox computing platform aimed at helping automakers design and test autonomous vehicles. The system connects to all of the sensors on a vehicle and creates a real-time 3D image of the environment. Four unnamed major automakers are already using the system, which NXP says will make mostly autonomous vehicles possible for the mass market by 2020. Graphics chip company NVIDIA offers an automotive platform, called Drive PX, that promises similar possibilities, so NXP certainly won't be free from competition.

Both Intel and NXP are positioning themselves to benefit from markets that should produce growth in the coming years. For Intel, cloud computing is the key to the company's strategy, while for NXP, the automotive market is the main target. Intel stock certainly appears inexpensive, trading at just 12.6 times analyst estimates for 2016 non-GAAP earnings, compared to about 14.8 for NXP. But I think NXP offers the superior growth opportunity. With Intel facing an uncertain transformation away from PCs, NXP looks like the better buy.