Best Semiconductor Stock: Mobileye vs. Nvidia | The Motley Fool

mobileye (MBLY 0.31%) and Nvidia (NVDA -1.51%) represent two very different ways to invest in the semiconductor industry. Mobileye, which was derived from Intel (INTC -1.11%) earlier this year, is the world’s 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 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 game focused on smarter cars

Mobileye controls around 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 foundation for driverless vehicles.

Mobileye’s systems run on its own EyeQ computer vision chips. Its newest chip, the EyeQ5, entered mass production last year and is designed for Tier 4 (nearly autonomous) and Tier 5 (fully autonomous) cars. It outsources the production of these chips to the Dutch chipmaker STMicroelectronics (STM -0.90%).

Mobileye’s revenue fell 10% in 2020 as the pandemic disrupted the auto market. But in 2021, its revenue jumped 43% as those headwinds faded and automakers ramped up production. In the first half of 2022, the company’s revenue grew 21% year-over-year as it caught up with this post-pandemic recovery.

Market demand still exceeds the available supply of chips, but STMicroelectronics’ supply chain constraints prevent it from fulfilling those orders.

Mobileye’s growth may stabilize once these supply chain issues are resolved. 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% additional in 2023.

This rosy outlook makes Mobileye a promising play in the driverless market, but it’s still not profitable on a GAAP (generally accepted accounting principles) basis. On a non-GAAP basis, its net income jumped 467% in 2020 and another 64% in 2021, but only rose 2% year-over-year in the first half of 2022, the company having increased spending (particularly to build up inventory of its EyeQ chips from STMicro) to overcome supply chain constraints.

Nvidia: Still heavily exposed to two shaky markets

Nvidia controlled 80% of the discrete GPU market in Q2 2022, according to JPR. In its most recent quarter, it generated 91% of its combined revenue from gaming and data center markets.

Nvidia’s heavy exposure to these two markets has paid off during the pandemic as consumers upgraded their PCs to play new video games, work from home and take classes remotely. The growing use of cloud-based services has also prompted data centers to purchase its high-end GPUs to process AI tasks more efficiently. This growth has been amplified by rising cryptocurrency prices, which has driven more people to mine cryptocurrency with Nvidia’s dedicated gaming and mining GPUs.

Nvidia’s non-GAAP revenue and EPS jumped 53% and 73%, respectively, in fiscal 2021 (which ended in January 2021). In fiscal 2022, its revenue increased by 61%, as its non-GAAP EPS increased a further 78%.

But those tailwinds have dissipated over the past year. PC sales have withered, strong headwinds have caused enterprise customers to postpone large transactions to the cloud, and falling crypto prices have prompted miners to flood the market with used GPUs. The Biden administration also recently banned Nvidia from shipping its top-tier data center chips to China, which was already a sore spot due to China’s pandemic lockdowns and game time restrictions for minors.

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

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

The evaluations and the verdict

None of these stocks are good deals yet. Mobileye is trading at 47 times forward earnings and 11 times next year’s sales, while Nvidia is trading at 37 times forward earnings and 14 times next year’s sales.

But if I had to pick one over the other right now I’d pick Mobileye because it’s growing faster it’s mostly dealing with short term supply chain issues instead of softening demand in its core markets like Nvidia, and it’s more tightly focused on a single growing market.

Nvidia remains a solid long-term investment, but it deserves to trade at a lower valuation.

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