It is estimated that the metaverse, according to McKinsey, claims the size of a market $5 trillion by 2030, Semiconductors are poised to play a major role in building the necessary infrastructure – whether it’s for data delivery, graphics or computation. in In my opinion, two major semiconductor companies are driving innovation in this field: Qualcomm (Nasdaq:QCOM) and Nvidia (Nasdaq:NVDA).
NVDA and QCOM shares have fallen significantly since the beginning of the year, nearly 60% for NVDA versus about 40% for QCOM. Thus, it may be tempting to start thinking about buying the dip. But which metaverse chip makers should you choose?
In this article I will discuss whether investing in Nvidia or Qualcomm is the best, comparing the two companies regarding (1) products and technology, (2) growth, (3) profitability and (4) valuation.
1. Technology and products
Both Nvidia and Qualcomm have strong exposure to secular trends regarding the next generation of the Internet, or in other words, the metaverse. But the technology associated with it is somewhat different.
To simplify, Nvidia is well positioned to grow alongside the metaverse-related gaming industry, or improve the experience industry, by providing AI and 3D visualization cloud computing solutions. Notable features in the Nvidia product suite include (not exhaustive): GeForce GPUs to power an advanced gaming experience; GeForce NOW to support computing power-intensive game streaming services and related infrastructure; and GPU software to support cloud-based visual and virtual computing.
Furthermore, one of NVIDIA’s most interesting “metaverse products” is the company’s “Omniverse” software, a cloud-based development framework for creating virtual and immersive 3D worlds. The Omniverse platform allows for realistic visualizations in real time and includes AI to support real-world simulations.
On the other hand, Qualcomm is focused on supporting the infrastructure needed for low-latency wireless data communications – which will be absolutely fundamental to the metaverse experience. Notably, Qualcomm’s Snapdragon chips currently power most, if not all, AR/VR devices, including the Meta (deadOculus Quest and Lenovo Mirage Solo. In September 2022, the company announced strategic partnership With Meta Platforms for customizing slides for VR/AR technologies. Mark Zuckerberg commented:
We are working with Qualcomm Technologies on dedicated virtual reality chips — powered by Snapdragon XR platforms and technology — for the future roadmap for Quest products.
Furthermore, QUALCOMM launched a file $100 million investment fund Dedicated to XR Technologies, which aims to:
… Accelerating the Metaverse Content Ecosystem and the Next Generation of Spatial Computing…
… To fund the developer ecosystem in XR experiences such as gaming, health and wellness, media, entertainment, education and enterprise.
Finally, Qualcomm also has exposure to 5G, artificial intelligence, automotive, consumer, enterprise, cloud, and the Internet of Things – technologies that potentially have an indirect connection to the metaverse infrastructure and experiences.
As a function of product portfolio, it can be said that it is very difficult to draw a conclusion that the company has stronger growth prospects. Accordingly, readers should acknowledge this section with a healthy dose of skepticism and independent thinking.
Personally, I think Qualcomm is better positioned to experience accelerated growth in the near term on the back of the launch of 5G and the adoption of higher VR technology. On the other hand, Nvidia’s technology and value proposition is based on the prerequisite that 5G communication infrastructure and low latency data have been widely accepted. Accordingly, I think Nvidia’s growth may be more delayed and predictable.
Looking at the past five years, Qualcomm and Nvidia have grown at a similar rate. Nvidia has grown at a compound annual growth rate of 25%while Qualcomm expanded its revenue by an average of 22.5% compound annual growth rate.
According to analyst consensus estimates, which predict project revenues through 2025, both companies will grow by an estimated 20% – 25% (source Bloomberg). This expectation may be reasonable, in my opinion, if the risk (innovation, research and technological development) is accepted by the economy with similar enthusiasm as it has been in the past decade, against the background of low interest rates and strong valuation multiples of growth assets. But with higher real returns and lower asset prices, growth in the technology sector is likely to be somewhat lower. Therefore, in my opinion, investors are advised to estimate the linear expansion of Nvidia and Qualcomm somewhere between 15% – 20%.
nvidia And the Qualcomm Both are highly profitable and demand profit margins that rival the profitability of FAANG’s leading technology companies. But in the context of a comparative head-to-head comparison between Nvidia and Qualcomm, I find it hard to come up with a quick idea. This comparison is perfectly balanced, in my opinion.
Over the subsequent twelve months, Nvidia was able to claim a gross margin of 60%, which is 20% higher than the tech sector average. Qualcomm’s gross profit margin is 58% sequentially, which is about 16% higher than the industry average. However, its operating income margin (EBIT, TTM reference) is 35.8% for Qualcomm, thus higher than 31.5% for Nvidia.
There is also no clear quick information on which company is most capital efficient. True, Qualcomm has a return on total assets (TTM reference) of around 27.4%, compared to 17.8% for Nvidia. But Nvidia generates $344,460 in net income per employee versus Qualcomm’s $285,800.
Given that Qualcomm and Nvidia both have a competitive size, growth, and profitability, an investor would expect the two companies to trade at a similar price. But this is very far from reality. Nvidia trades much more expensive.
According to the data collected by Search Alpha, Qualcomm They are valued on a one-year forward P/E of x9, while nvidia P/E futures for one year is x36. The P/E multiplier, therefore, means a 40% discount on Qualcomm’s sector valuation, versus Nvidia’s 114% premium.
The evaluation dispersion argument can be made for all relevant complications, including P/S and P/B. More data are attached.
To summarize the situation, as I see it, both Nvidia and Qualcomm are very competitive in terms of technology, growth prospects, and profitability. But Qualcomm is clearly trading cheap, while Nvidia is not. Moreover, the dispersion of the valuation is very important, since investors must consider that the attractiveness of each investment opportunity should be a function of the price. Thus, the investment decision should be easy: Qualcomm is the one to buy.
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