Mobile (MBLY Legal interest rate 0.31%) and Nvidia (NVDA -1.51%) represent two very different ways to invest in the semiconductor sector. Mobileye, which was separated from it Intel (INTC -1.11%) earlier this year, is the world’s leading manufacturer of advanced driver assistance systems (ADAS) and computer vision chips for semi-autonomous and autonomous vehicles.
Nvidia is the world’s largest manufacturer of discrete GPUs for PC gaming and data centers. It also generates a small percentage of its revenue (4% in its last quarter) from automotive chips for connected and driverless cars. It also sells GPUs for the professional visualization market. So which of these stocks is the best overall investment in this tough market?
Mobileye: A focused game about 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 lane, and automate other tasks to make driving much easier and safer. They also serve as the technological basis of driverless vehicles.
Mobileye systems run on their 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 a Dutch chipmaker STMicroelectronics (STM -0.90%).
Mobileye’s revenue fell 10 percent in 2020 as the pandemic disrupted the auto market. But in 2021, its revenue increased by 43 percent as it reduced costs and increased bus production. In the first half of 2022, the company’s revenue rose 21% year over year as it bucked the post-pandemic recovery.
Market demand still exceeds supply of available chips, but supply chain constraints at STMicroelectronics prevent it from fulfilling these orders.
Once those supply chain issues are resolved, Mobileye’s growth could stabilize. It still expects its ADAS solutions to be installed in “more than 266 million additional vehicles by 2030,” while analysts expect its revenue to grow 29% this year and 21% in 2023. to be
That rosy outlook makes Mobileye a promising play on the driverless market, but it’s still unprofitable on a GAAP (generally accepted accounting principles) basis. On a non-GAAP basis, its net income rose 467% in 2020 and 64% in 2021, but only rose 2% year-over-year in the first half of 2022 as the company increased spending (especially on building up its inventory of EyeQ chips from STMicro) to overcome supply chain constraints.
Nvidia: Still heavily exposed to two turbulent markets
According to JPR, Nvidia controlled 80% of the discrete GPU market in the second quarter of 2022. In its last quarter, it generated 91% of its revenue from the gaming and data center markets combined.
Nvidia’s heavy exposure to those two markets paid off during the pandemic as consumers upgraded their PCs to play new video games, work from home and attend remote classes. The increased use of cloud-based services has also led data centers to purchase their own GPUs to handle AI tasks more efficiently. That growth was fueled by rising cryptocurrency prices, which drove more people to mine cryptocurrencies with Nvidia’s gaming and dedicated mining GPUs.
Nvidia’s non-GAAP revenue and EPS increased 53% and 73%, respectively, in fiscal 2021 (which ended in January 2021). In 2022, its revenue rose 61% as non-GAAP EPS rose another 78%.
But those tailwinds have dissipated over the past year. PC sales dried up, macro headwinds caused enterprise customers to put off big cloud deals, and falling crypto prices allowed miners to flood the market with second-hand GPUs. The Biden administration recently banned Nvidia from shipping its top-tier data center chips to China, which was already a soft spot due to China’s pandemic shutdown and restrictions on video game time for minors.
As a result, Nvidia’s revenue in the first nine months of fiscal 2023 grew just 9% year over year as its non-GAAP EPS fell 21%. Analysts expect its earnings to be flat for the rest of the year and to grow by just 9% in 2024.
Nvidia is growing much more slowly than Mobileye, and its gaming and data center markets could remain shaky for the foreseeable future. However, Nvidia is also solidly profitable on a GAAP basis — which may make it a more solid investment if interest rates rise.
Values and decisions
One of these stocks is still a roaring market. Mobileye is at 47 times forward earnings and 11 times next year’s sales, while Nvidia is at 37 times forward earnings and 14 times next year’s sales.
But if I had to choose one over the other right now, I’d choose Mobileye because it’s growing faster, it’s mainly struggling with near-term supply chain issues rather than demand across its core markets. like Nvidia, smooth it out, and focus more on it. a single market is growing.
Nvidia is still a solid long-term investment, but it deserves to trade at a lower valuation.
Leo Sun has no position in any of the stocks mentioned. The Motley Fool chimes in and recommends Intel and Nvidia. The Motley Fool recommends the following options: long January 2023 $57.50 Intel calls, long January 2025 $45 calls on Intel, and short January 2025 $45 Intel calls. The Motley Fool has a disclosure policy.