Investing in chip stocks has been a profitable move during the current global downturn. Semiconductor companies saw demand for their products soar, boosted by the gaming industry and cloud computing as more companies transitioned to letting their employees work from home.
Nonetheless, many chip makers still face an uncertain environment as tensions between the US and China escalate and the spike in demand caused by the sudden trend of working from home is likely to abate as the economy reopens and workers return to headquarters.
Most analysts expect semiconductor business to improve in 2020, when the industry is expected to receive a significant boost from the expansion of cloud infrastructure spending.
However, there are two chip stocks – Qualcomm (NASDAQ 🙂 and NVIDIA (NASDAQ 🙂 – that are in a different league. Each has a strong balance sheet, robust cash flow and diverse product categories, all of which are expected to remain strong in the current environment. Here's our take on which stocks are a better buy in the current environment.
NVIDIA: Gaming and Data Center Strength
A sharp and impressive rise in NVIDIA stock during the current global health crisis clearly separates this chip stock from the crowd. Shares of NVIDIA are up more than 90% this year and vastly outperformed the which is up about 20% since early 2020.
While the chipmaker is unlikely to escape any slowdown in demand from cyclical industries, such as automobiles, analysts are focusing on the company's deliveries to gaming and data center customers.
NVIDIA, based in Santa Clara, California, is the largest maker of graphics chips used in PC games. In recent years, the chipmaker has successfully adapted its technology to the artificial intelligence market, creating a multi-billion dollar new company.
According to Chief Executive Officer Jensen Huang, the use of such computers is expanding, making growth less dependent on the spending plans of a handful of companies.
Most of the company's sales still come from PC gaming, where NVIDIA graphics chips provide the most realistic experiences. Top-of-the-line GeForce parts cost more than many consumers spend on an entire PC.
Following the stock's surge this year, NVIDIA is now one of the most highly regarded chip stocks with a price-earnings ratio of 83.59, more than twice the semiconductor group's average of 38.53. That makes the stock prone to correction for any negative surprise, especially when the economic and geopolitical environment remains fragile.
Qualcomm emerges from legal battles unharmed
Unlike NVIDIA, Qualcomm emerges from a tumultuous quintet. – A one-year period of high-stakes anti-trust battle with the US government, an activist shareholder advocating the split of the company, a hostile $ 117 billion takeover attempt and the scars of mounting trade tensions between the US and China.
But the good news for investors is that the worst is over and the future looks promising for Qualcomm, which produces chips that connect cell phones and other devices to wireless networks.
The chipmaker won a major victory in a federal appeals court on Tuesday, which ruled that in 2019 a judge had falsely sided with the Federal Trade Commission when he discovered Qualcomm had violated antitrust laws.
The appeals court also dropped an injunction requiring the company to re-grant licensing agreements with smartphone makers such as Apple (NASDAQ 🙂 and Samsung Electronics (OTC :). Such licenses generated $ 4.6 billion in revenue for Qualcomm last year.
The San Diego-based company is also getting a big boost from the ongoing shift to 5G.
“We anticipate the next tipping point in our 5G disaster to begin in (the September quarter), with strong year-over-year sales and EPS growth, putting us well positioned for continued growth in fiscal year 2021., ”CEO Steve Mollenkopf told analysts during an earnings call.
Michael Walkley of Canaccord Genuity is now predicting a 47% upside potential for Qualcomm after taking his stock price forecast from $ 115 to $ 137 on July 30th. Qualcomm stock is up about 30% this year, closing at $ 115.79 on Wednesday.
"As smartphone volumes begin to recover and are expected to improve in the second half of this year, Qualcomm is well positioned to capitalize on the long-term 5G investment cycle and anticipate recovering revenues in F2021," Walkley said.
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Bottom Line
Both NVIDIA and Qualcomm have attractive draws for investors looking to take advantage of a resurgence in chip demand. That said, Qualcomm appears to have more upside potential as the smartphone chip giant is experiencing a period of relative calm, taking advantage of the increasing demand for new 5G handsets.
