Investors looking to get in on some of the latest tech trends would be wise to consider NVIDIA Corporation (NASDAQ: NVDA) and CalAmp (NASDAQ: CAMP). NVIDIA makes most of its money from selling graphics processors in the gaming market (mainly for PCs), but it's also using its chips to lead the way in artificial intelligence and driverless cars. Meanwhile, CalAmp is a pure-play on the burgeoning Internet of Things market and its hardware and software connect industrial equipment to the internet like never before.
While both companies are betting on growing tech trends, it's worth looking at each company's financial situation, competitive advantage, and valuation to figure out which is the better stock right now.
First, let's look at a few key financial metrics to see which company looks in better shape. Here's how CalAmp and NVIDIA stack up:
NVIDIA is in much better financial shape than CalAmp right now with less debt (relative to its cash), higher free cash flow and, of course, its positive net income. NVIDIA has built-up its strong financial position after years of being the top-dog in the graphics processing space. The company's sales in the gaming segment account for 53% of its revenue, and the profits from that are helping to fuel growth into new markets.
CalAmp is a much smaller company that's still carving out its niche in the nascent Internet of Things market, so it's not all that surprising that it's not profitable at the moment. The company is reinvesting its revenues into building out new products that will, hopefully, be profitable over the long term. Alas, NVIDIA gets the win here, for now.
I've already mentioned how much money NVIDIA makes from its graphics processing units (GPUs) in the gaming space, but how much of an advantage over the competition does the company really have? In short, a ton.
NVIDIA holds more than 72% of the discrete desktop GPU market right now, with its closest competitor Advanced Micro Devices (NASDAQ: AMD) owning less than 30%.
But NVIDIA is also a key player in the driverless car and artificial intelligence markets, and it's leaving its competition far behind. The company has partnered with at least five automakers to use its semi-autonomous Drive PX supercomputer in their vehicles and recently announced a partnership with China-based internet tech giant Baidu to do the same for Chinese vehicles. Rival AMD doesn't offer a competitive system to Drive PX, making NVIDIA's GPUs the go-to source for graphics processors in semi-autonomous vehicles.
Additionally, NVIDIA's GPUs are used in an increasing amount of AI servers (including for Facebook, Google, and others) and the company's new partnership with Baidu includes supplying its Volta processors for Baidu's cloud services. AMD recently unveiled a new AI chip in its lineup, but NVIDIA still outpaces AMD in both technology and partnerships.
CalAmp's business is mainly focused on machine-to-machine (M2M) telematics hardware and services. This includes technologies for usage-based insurance, industrial equipment tracking, cold chain supply management, and vehicle tracking and recovery.
CalAmp may be a small company, but it has a huge reach. It currently has more than five million devices that are under the company's management on its platform and boasts more than 653,000 unique software application subscribers.
One of CalAmp's key competitors is Sierra Wireless, which makes some similar hardware and software for tracking vehicles and equipment. Sierra earns about 33% of all the global wireless module revenue right now, which makes it the leader in this connectivity technologies.
CalAmp does have its own advantages though, particularly in the industrial equipment market. Caterpillar is a key customer for CalAmp and is spending about $6 million on CalAmp tech this year, and $7 million to $8 million next year.
But compared to NVIDIA's competitive advantages, CalAmp can't quite keep up. Sierra Wireless and other competitors are more than capable of creating similar hardware and software to CalAmp, which means the company can't secure a significant economic moat around its products or services. NVIDIA, on the other hand, is far ahead of its competitors in several key markets, which gives the company the win in this category as well.
Finally, let's compare the valuations of both companies by looking at their price-to-earnings (P/E) ratio and their price-to-sales ratio. The P/E ratio helps give us some perspective on how much investors are willing to spend for every dollar of company earnings, and the price-to-sales (which is found by dividing a company's market capitalization by its revenue) will help us better evaluate CalAmp because the company doesn't have any positive earnings right now.
Since CalAmp doesn't have any positive earnings we can't exactly compare NVIDIA's P/E ratio to CalAmp's, or CalAmp's price-to-sales to NVIDIA's. So instead we'll look at them separately and compare them to a relevant industry average.
NVIDIA's P/E is a hefty 53.4, making it relatively expensive compared to the technology industry's average of about 26. That would make the company's stock technically "expensive," though investors should factor in the company's growth prospects that I mentioned above before dismissing the company as overpriced.
Meanwhile, CalAmp's price-to-sales of 1.81 is lower than the tech industry's average of 3.77, making it relatively less expensive than other companies in the technology industry.
Valuation metrics can be tricky because you never want to invest in a stock solely based on just one metric. So while NVIDIA is technically overvalued compared to other technology stocks, and CalAmp looks more undervalued, you still need to factor in financial fortitude and competitive advantage into your decision-making process.
I've got to give NVIDIA the win for this match-up based on its stellar competitive advantage, its overall financial fortitude, and its opportunities in new markets like AI and driverless cars. CalAmp certainly has lots of potential -- and both companies are recommended on some Motley Fool premium services -- but NVIDIA's strong earnings and solid position against its rivals make it the better bet right now.
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Chris Neiger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Baidu, Facebook, Nvidia, and Sierra Wireless. The Motley Fool recommends CalAmp. The Motley Fool has a disclosure policy.