With global chip shortages forecast for the foreseeable future, we delve into two semiconductor companies and ask which is a better buy?
Oct. 6, 2021
The semiconductor industry is expanding despite economic challenges due to COVID-19. Semiconductors are increasingly important with use cases in future relevant industries creating a lucrative opportunity for companies.
We ask if Nvidia (NASDAQ: NVDA), which has surpassed Intel (NASDAQ: INTC) as the most valuable U.S. chipmaker by market capitalization, is a better investment today?
Nvidia: Bull vs Bear arguments:
Nvidia is a technology company headquartered in California, led by founder and CEO Jensen Huang, and is renowned for producing graphic processing units (GPUs) for gaming.
Nvidia had an impressive Q2 of fiscal 2022, reporting revenue growth of 68% year-over-year (YoY), reaching $6.51 billion with expanding gross margins of 64.8%. It is also profitable, reporting a net income of $2.74 billion, and issued strong guidance for Q3.
Its gaming revenue increased by 85% as it benefits due to its superior tech and trends such as streaming. Nvidia isn’t resting on its laurels and released new GPUs in June along with demand outstripping supply in the gaming segment.
Beyond gaming, Nvidia generated roughly one-third of its revenue from data centers, with all major cloud providers as its customers. Other segments such as automotive are exciting areas for growth where it believes it will see an inflection point in revenue in the coming years. NVIDIA DRIVE is a market leader and has helped to power AutoX, one of the first self-driving vehicles without needing a safety driver.
A major risk factor is its attempted acquisition of chip licensor ARM from SoftBank Group for $40 billion. The deal has yet to close amid regulatory scrutiny due to competition concerns in the UK and EU. A failure to complete this deal would slow Nvidia’s plans to challenge Intel’s dominance in the chip processing units (CPUs) space.
Intel: Bull vs Bear arguments:
Intel is a stalwart in the chip-making industry, founded in 1968, and has predominantly made CPUs.
It is the largest semiconductor chip company by revenue, generating $19.6 billion in Q2 2021, which was flat YoY with a gross margin of 59.2%. The company also reported a net income of $5.06 billion and pays a quarterly dividend.
CEO Pat Gelsinger believes that the chip shortage will last at least another two years and that the semiconductor industry as a whole is at the start of a decade of growth. Intel should also benefit from subsidies granted by the U.S. government to the semiconductor industry, and has also outlined a roadmap to reclaiming its product leadership position by 2025.
The lack of revenue growth despite a favorable environment in the semiconductor industry may be a concern. Furthermore, Intel’s client computing group, which accounted for over half of revenue in the quarter, appears to be struggling. The average selling price of notebook and desktop processors declined YoY and is perhaps due to competition and losing its pricing power.
So, which stock is a better buy right now?
Nvidia appears to be the better buy today due to its future growth prospects and revenue that continues to climb higher, while Intel appears to be faltering
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