Nvidia vs. Qualcomm: the battle of the metaverse chipmakers

photoman

Thesis

According to McKinsey, the metaverse is expected to claim a $5 trillion market size by 2030, and semiconductors are poised to play a key role in building the necessary infrastructure, whether for data communication, graphics or calculation. In In my opinion, there are two major semiconductor companies that are at the forefront of innovation in this area: Qualcomm (NASDAQ: QCOM) and Nvidia (NASDAQ: NVDA).

NVDA’s and QCOM’s shares are down significantly since the beginning of the year, nearly 60% for NVDA compared to around 40% for QCOM. So, it might be tempting to start considering buying the dip. But which of the metaverse chip makers should you choose?

QCOM versus NVDA

Looking for Alpha

In this article, I will discuss the preference of an investment in Nvidia or Qualcomm, comparing the two companies with respect to (1) products and technology, (2) growth, (3) profitability, and (4) ) valuation.

1. Technology and products

Both Nvidia and Qualcomm are heavily exposed to secular trends related to the next-generation internet, or in other words, the metaverse. But their associated technology differs somewhat.

Nvidia

Simply put, Nvidia is well positioned to grow alongside the metaverse-related gaming industry, or better the experience industry, by providing solutions for AI cloud computing and 3D visualization technology. Notable highlights of Nvidia’s product portfolio include (non-exhaustive): GeForce GPUs to deliver cutting-edge gaming experience; GeForce NOW to support compute-intensive game streaming services and associated infrastructure; and GPU software to support cloud-based visual and virtual computing.

Additionally, one of NVIDIA’s most interesting “metaverse products” is the company’s “Omniverse” software, which is a cloud-based development framework for creating virtual and immersive 3D worlds. The “Omniverse” platform enables real-time photorealistic visualizations and integrates AI to support realistic simulations.

Nvidia Omniverse

Nvidia

Qualcomm

Qualcomm, on the other hand, is focused on supporting the infrastructure needed for low-latency wireless data communication, which will be absolutely essential for the metaverse experience. Notably, Qualcomm’s Snapdragon chipset currently powers most, if not all, AR/VR devices, including Meta’s Oculus Quest (META) and Lenovo’s Mirage Solo. In September 2022, the company announced a strategic partnership with Meta Platforms to customize chipsets for VR/AR technologies. Mark Zuckerberg commented:

We are working with Qualcomm Technologies on custom VR chipsets – powered by Snapdragon XR platforms and technology – for our future Quest product roadmap

In addition, QUALCOMM has launched a $100 million investment fund dedicated to XR technologies, which aims to:

accelerating the Metaverse content ecosystem and the next generation of spatial computing…

for funding the ecosystem of developers in XR experiences such as gaming, health and wellness, media, entertainment, education and enterprise.

Finally, Qualcomm also benefits from exposure to 5G, artificial intelligence, automotive, consumer, enterprise, cloud and IoT – technologies that will likely have an indirect connection to metaverse infrastructure and experience.

2. Growth

Depending on the product portfolio, it is arguably extremely difficult to conclude which company has the best growth prospects. And accordingly, readers should acknowledge this section with a healthy dose of skepticism and independent thought.

Personally, I think Qualcomm is better positioned to experience near-term growth acceleration amid the rollout of 5G and increased adoption of VR technology. Nvidia’s technology and value proposition, on the other hand, relies on the precondition that the infrastructure for 5G and low latency data communication has been widely accepted. As a result, I think Nvidia’s growth might be a bit more delayed and speculative.

Over the past 5 years, Qualcomm and Nvidia have experienced similar growth. Nvidia grew at a compound annual growth rate of 25%, while Qualcomm grew revenue at a CAGR of 22.5%.

Consensus estimates from analysts, who forecast revenue through 2025, expect both companies to grow by an estimated 20%-25% (Source Bloomberg). This anticipation could be reasonable, in my opinion, if risk-taking (innovation and technological R&D) is accepted by the economy with the same enthusiasm as it has been over the last decade, in a context of low interest rates and high valuation multiples for growth assets. But with real yields rising and asset prices falling, growth in the tech sector is likely to be somewhat weaker. So, in my opinion, investors are well advised to estimate a topline expansion for Nvidia and Qualcomm between 15% and 20%.

3. Profitability

Nvidia and Qualcomm are both very profitable and boast margins that rival the profitability of leading technology companies FAANG. But in the context of a direct relative comparison between Nvidia and Qualcomm, I find it difficult to draw any insightful conclusion. This comparison is perfectly balanced, in my opinion.

For the last twelve months, Nvidia has managed to claim a gross profit margin of 60%, which is 20% above the tech sector median. Qualcomm’s gross margin was 58% respectively, about 16% above the industry median. However, the operating margin (EBIT, reference TTM) is 35.8% for Qualcomm and therefore higher than the respective 31.5% for Nvidia.

Nor is there a clear conclusion about which company is using capital most efficiently. It is true that Qualcomm enjoys a return on total assets (TTM benchmark) of around 27.4%, compared to 17.8% for Nvidia. But Nvidia generates $344,460 in net income per employee compared to $285,800 for Qualcomm.

Nvidia

Nvidia profitability

Looking for Alpha

Qualcomm

Qcom profitability

Looking for Alpha

4. Valuation

Given that Qualcomm and Nvidia boast competitive size, growth and profitability, an investor would expect the two companies to trade at a similar valuation. But this is very far from reality. Nvidia is trading much more expensive.

According to data compiled by Seeking Alpha, Qualcomm is valued at a one-year forward P/E of x9, while Nvidia’s one-year forward P/E is x36. Therefore, the P/E multiple implies a sector valuation discount of 40% for Qualcomm, against a respective premium of 114% for Nvidia.

The argument for valuation dispersion can be made for all relevant multiples, including P/S and P/B. Attached some additional data.

Nvidia

Nvidia Rating

Looking for Alpha

Qualcomm

QCom Valuation

Looking for Alpha

Conclusion

To sum up the situation, as I see it, Nvidia and Qualcomm are very competitive in terms of technology, growth prospects and profitability. But Qualcomm is clearly trading low, unlike Nvidia. Moreover, the dispersion of valuations is very important, because investors must consider that the attractiveness of each investment opportunity must be a function of price. Therefore, the investment decision should be easy: Qualcomm is the one to buy.

About Alexander Estrada

Check Also

Developers could have prevented 2022 crypto hacks if they had taken basic security measures

Users who lose funds due to malicious activity are virtually unheard of on Ethereum. In …