Better Buy: NVIDIA Corporation vs. Qualcomm

In addition to their respective strong performances last year, both NVIDIA (NASDAQ: NVDA) and Qualcomm (NASDAQ: QCOM) are positioned for a strong 2018. The reason NVIDIA and Qualcomm shareholders should have sky-high expectations is that their forays into fast-growing markets -- including artificial intelligence (AI) and the Internet of Things (IoT), among others -- offer virtually limitless potential.

NVIDIA is already reaping the rewards of its market expansion beyond gaming. Much of the news surrounding Qualcomm is legal-related, yet it's also laid the foundation for growth outside of its smartphone dominance. Which is the better buy: NVIDIA or Qualcomm? It's a pleasantly difficult question, but one wins by a nose.

The case for Qualcomm

Unfortunately, any discussion of Qualcomm has to include its legal issues. Though Qualcomm shelled out $2.65 billion to settle disputes regarding licensing fees with Korea and Taiwan authorities, along with BlackBerry last fiscal year, there are two remaining issues to be settled.

The U.S. Federal Trade Commission (FTC) has brought suit against Qualcomm. But the issue hurting Qualcomm today is with longtime customer Apple withholding royalty payments. Licensing is Qualcomm's most profitable unit, generating nearly two-and-a-half times the earnings before taxes (EBT) than its product division a year ago. This past quarter, the $829 million in licensing EBT was a 48% decline and was outpaced by Qualcomm's product EBT of $973 million.

The settlements last quarter also hurt, resulting in a 90% plunge in earnings per share (EPS) to $0.11 compared to $1.07 a year ago. Operating income declined 82% to $300 million versus $1.8 billion last year. Despite the negative impact on EPS and operating income, Qualcomm reported a surprisingly strong $5.9 billion in revenue, just 5% less year over year, handily beating expectations.

Beyond its relatively strong revenue, Qualcomm's push into 5G, IoT such as smart cars and wearables, mobile computing, and cloud networking appears to have appeased long-term investors. The legal issues have hurt in the near term, but with its stock price actually up 1% the past year, many investors are focused on the future, and rightfully so.

Qualcomm has been down the legal path before, shelling out $975 million to China two years ago, which it now cites as a key revenue driver. For investors with a long-term perspective, Qualcomm and its 3.44% dividend yield warrant a good look.

The case for NVIDIA

Last quarter was a microcosm of NVIDIA's 2017. Record revenue of $2.64 billion was a 32% improvement over a year ago and more than offset NVIDIA's 24% rise in operating expenses. However, much of the overhead increase was from NVIDIA's research and development (R&D) which, given its push into cutting-edge markets, is more than acceptable.

NVIDIA's top-line growth and improving margins also pushed operating income up 40% to $895 million, and EPS soared 60% to $1.33 a share. NVIDIA's financials continue to be off the charts, but it's how the outstanding results are being achieved that bodes well for its future.

The release of the AI-ready TensorRT data center platform is already a hit, and NVIDIA's Volta graphic processing unit (GPU) -- another AI solution -- has been adopted by even more of the world's largest companies. NVIDIA continues to be the dominant gaming provider on the planet, and its new-ish GeForce GPU has become the virtual reality (VR) industry standard.

Smart cars and "AI Edge Computing," NVIDIA's platform designed for the world's smart cities, is yet another opportunity with endless potential. NVIDIA is not only producing mind-boggling financials with each passing quarter, it's making inroads into areas that will keep its positive momentum going long into the future.

And the better buy is...

At 0.30%, NVIDIA's dividend yield certainly can't match Qualcomm's, which gives a slight edge to the latter in terms of which is the better buy for income investors. As alluded to earlier, Qualcomm also represents an outstanding long-term growth opportunity.

However, the record results NVIDIA is posting each quarter, combined with the significant steps it's already made into nearly untapped markets, is hard to beat. For those reasons, NVIDIA gets the nod as the better buy.

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Tim Brugger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple and Nvidia. The Motley Fool owns shares of Qualcomm and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.