Better Semiconductor Stock: Mobileye vs. Nvidia

Mobile (MBLY 0.31%) and Nvidia (NVDA -1.51%) They represent two very different ways of investing in the semiconductor sector. Mobileye, which was ripped off Intel (INTC -1.11%) At the beginning of the year, it is a leading producer of advanced driver assistance systems (ADAS) and computer vision chips for semi-autonomous and autonomous vehicles.

Nvidia is the world’s largest producer of discrete GPUs for gaming PCs and data centers. It also generates a small percentage of its revenue (4% in its last quarter) from chips for connected and driverless cars. It also sells GPUs for the professional display market. So which of these stocks is the better overall investment in this challenging market?

A person reads a book in a driverless vehicle.

Image source: Getty Images.

Mobileye: Focused on smarter cars

Mobileye controls about 70% of the ADAS market. These systems use sensors and cameras to detect parking hazards, keep a vehicle centered in a single lane, and automate other tasks to make driving much easier and safer. They also serve as the technological basis of driverless vehicles.

Mobileye’s system is powered by its EyeQ computer vision chips. Its newest chip, the EyeQ5, went into mass production last year and is designed for Level 4 (nearly autonomous) and Level 5 (fully autonomous) cars. It outsources the production of these chips to the Dutch chipmaker STMicroelectronics (STM -0.90%).

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Mobileye’s revenue fell 10% in 2020 as the pandemic disrupted the car market. But its revenue rose 43% in 2021 as those headwinds eased and automakers ramped up production. In the first half of 2022, the company’s revenue rose 21% year-over-year as it outpaced its post-pandemic recovery.

Market demand is still outpacing available chip supply, but STMicroelectronics’ supply chain constraints are preventing it from fulfilling those orders.

Mobileye’s growth could stabilize once these supply chain issues are resolved. It still expects its ADAS solutions to be installed in “an additional 266 million vehicles by 2030,” which analysts predict will increase its revenue by 29% this year and another 21% in 2023.

That rosy outlook makes Mobileye promising in the driverless market, but not yet profitable on a GAAP (generally accepted accounting principles) basis. Its GAAP net income rose 467% in 2020 and another 64% in 2021, but only rose 2% year over year in the first half of 2022 as the company ramped up spending (mainly to build up its EyeQ inventory. STMicro- ’s chips) to overcome supply chain constraints.

Nvidia: Continues to be affected by two broad markets

Nvidia controlled 80% of the discrete GPU market in the second quarter of 2022, according to JPR. Last quarter, it generated a combined 91% of its revenue from the gaming and data center markets.

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Nvidia gained significant exposure to both of those markets during the pandemic, as consumers upgraded their PCs to play new video games, work from home and attend remote classes. The growing use of cloud-based services prompted data centers to purchase high-end GPUs to process AI tasks more efficiently. This growth was fueled by rising cryptocurrency prices, which encouraged more people to mine cryptocurrencies with Nvidia’s gaming and dedicated mining GPUs.

Nvidia’s revenue and non-GAAP EPS rose 53% and 73%, respectively, in fiscal 2021 (ending January 2021). In fiscal 2022, its revenue rose 61%, as non-GAAP EPS rose another 78%.

But those tailwinds dissipated in the past year. PC sales dried up, macro headwinds caused enterprise customers to delay major cloud deals, and falling crypto prices prompted miners to flood the market with second-hand GPUs. The Biden administration recently banned Nvidia from shipping its high-end data center chips to China, which was already vulnerable to China’s pandemic lockdowns and restrictions on underage video games.

As a result, Nvidia’s revenue grew just 9% year-over-year as non-GAAP EPS fell 21% in the first nine months of 2023. Analysts expect its revenue to be flat for the full year and to rise just 9% in fiscal 2024.

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Nvidia is growing much more slowly than Mobileye, and its gaming and data center markets may be shaky for the foreseeable future. However, Nvidia is also profitable on a GAAP basis, which could make it a stronger investment if interest rates continue to rise.

Ratings and judgment

None of these stocks are screaming bargains yet. Mobileye trades at 47 times forward earnings and 11 times next-year sales, while Nvidia trades at 37 times forward earnings and 14 times next-year sales.

But if I had to choose one over the other right now, I’d pick Mobileye because it’s growing faster, especially as it struggles with near-term supply chain issues instead of softening demand in key markets like Nvidia, and it’s more focused. the only growing market.

Nvidia is still a solid long-term investment, but it’s worth trading at a lower valuation.

Leo Sun has no position in the aforementioned stocks. The Motley Fool has positions and recommends Intel and Nvidia. The Motley Fool recommends the following options: a long January 2023 $57.50 Intel, a long January 2025 $45 Intel, and a short January 2025 $45 Intel. The Motley Fool has a disclosure policy.

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