Better Buy: NVIDIA vs. Qualcomm

By Harsh Chauhan Markets Fool.com

NVIDIA's (NASDAQ: NVDA) success in PC graphics cards and its rapid progress in nascent markets such as autonomous cars have translated into huge gains on the stock market in the past year. In fact, the graphics chipmaker has outperformed the NASDAQ-100 Technology Sector Index by a wide margin, but the same cannot be said about industry peer Qualcomm (NASDAQ: QCOM).

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NVDA data by YCharts.

Qualcomm has been plagued by competition from Taiwanese rival MediaTek that's eating into its market share, while a lawsuit from Apple has brought more negative publicity. Simply put, the chipmaker is finding it difficult to grow even as NVIDIA is showing no signs of stopping.

NVDA Revenue (TTM) data by YCharts.

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But is Qualcomm's weakness an opportunity in disguise, or is NVIDIA a better bet despite its terrific rise in the past year?

The case for Qualcomm

Qualcomm needs to be given credit for pursuing several fast-growing markets to elevate its growth, including feature phones and virtual reality hardware. Though the chipmaker's smartphone application processor market share has taken a beating in the last couple of years owing to MediaTek's rise, it is now taking the game to its rivals.

Qualcomm's Asian rival has thrived by offering lower-cost chips to smartphone manufacturers. In fact, MediaTek's strategy helped it increase its smartphone processor market share to 23% in the first half of 2016 from just 14% at the end of 2014.

Qualcomm is now taking a leaf out of MediaTek's playbook by targeting low-to-mid-range smartphones. The good news is that this strategy seems to be bearing fruit, as it could be gaining market share in China, which is not surprising as Qualcomm is winning over certain chip spots from MediaTek.

Image source: Qualcomm.

What's more, Qualcomm is also gaining traction at key Chinese smartphone manufacturers, such as Vivo and Oppo, that are expected to dominate the industry. The American chipmaker signed a patent licensing agreement with these companies in August last year, and it has already found a way inside Oppo's latest F3 Plus smartphone with its Snapdragon 652 processor.

Qualcomm's partnerships with Chinese manufacturers will be important in boosting its smartphone processor market share. This is because the country's top three OEMs -- Oppo, Vivo, and Huawei -- could account for a third of global smartphone shipments this year with 500 million units in sales.

Additionally, Qualcomm is also making a move into the potentially fertile feature phone market with its latest 205 mobile platform. The chipmaker plans to bring LTE and digital payments services to sub-$50 phones with its latest launch, which is a smart move as 400 million feature phones were sold last year, according to Counterpoint Research.

However, China could also pose a concern for Qualcomm as the government is trying to promote a domestic chip-making industry with a $100 billion investment. In fact, Xiaomi has already taken this route as it recently announced that its latest Mi 5C smartphone will be powered by an in-house chip. This is a red flag since Xiaomi is one of Qualcomm's customers, and the possibility of others following suit could land a body blow to the chipmaker's Chinese business.

To mitigate the risk from China, Qualcomm is moving early into virtual reality (VR) hardware by offering a developer kit to accelerate the development of head-mounted displays (HMDs), which could be a $29 billion industry in 2020. Not surprisingly, the chipmaker wants to take the lead in this space by trying to become the supplier of choice to HMD manufacturers.

The case for NVIDIA

NVIDIA's terrific growth is not going to stop anytime soon as it dominates the discrete graphics processing units (GPU) market with a 70% market share. In fact, gaming contributes more than 60% to the chipmaker's business, which is good news for investors as the segment will witness annual growth of 6% for the next two years, according to Jon Peddie Research.

Not surprisingly, NVIDIA is trying to maintain its lead in this market by tapping high-end gaming systems -- which accounted for 43% of hardware last year -- and launching its latest flagship GPU before rival AMD could make its move. As it turns out, NVIDIA has upped the ante in the GPU war by bringing out a new high-performance product -- the GTX 1080 Ti -- which is around 20% to 45% faster than its predecessor.

More importantly, NVIDIA's lead in gaming graphics should give its top line a strong boost as GPU shipments could rise to 67 million units in 2020 from around 30 million units in 2015, according to Research and Markets.

What's more, NVIDIA is putting its GPU expertise to good use in the automotive market, which presents a lucrative revenue growth opportunity. In fact, the company is already supplying its autonomous car platform to Tesla's electric car line-up, while it has also started working with PACCAR to develop fully autonomous self-driving trucks.

In all, NVIDIA believesit has a revenue opportunity of $6 billion to $10 billion in the automotive space, and it is going all-out to target the same by partnering with big manufacturers.

The better buy

NVIDIA is a high-growth play as its earnings are expected to grow around 18% over the next year, compared to Qualcomm's muted growth projection of less than 3%. Not surprisingly, NVIDIA carries a premium over Qualcomm from a valuation perspective, with the GPU maker trading at almost 42 times last year's earnings as compared to the latter's trailing price-to-earnings ratio of 17.

Additionally, Qualcomm's market share is under threat from Asian rivals. NVIDIA, meanwhile, is dominating its core market hands-down and is spreading its wings into other fast-growing areas that could lead to stronger returns.

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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple, Nvidia, Paccar, Qualcomm, and Tesla. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool has a disclosure policy.