Mobileye(NASDAQ: MBLY) and Nvidia(NASDAQ: NVDA) represent two very different ways to invest in the semiconductor sector. Mobileye, which was spun off from Intel(NASDAQ: INTC) 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 latest 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 better overall investment in this challenging market?
Mobileye: A focused play 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 a lot easier and safer. They also serve as the technological bedrock of 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 Level 4 (nearly autonomous) and Level 5 (fully autonomous) cars. It outsources the production of these chips to the Dutch chipmaker STMicroelectronics(NYSE: STM).
Mobileye's revenue fell 10% in 2020 as the pandemic disrupted the auto market. But in 2021 its revenue jumped 43% as those headwinds waned and automakers ramped up production. In the first half of 2022, the company's revenue rose 21% year over year as it lapped that post-pandemic recovery.
The market's demand is still outstripping its available supply of chips, but supply chain constraints at STMicroelectronics are preventing it from fulfilling those orders.
Mobileye's growth could stabilize once those supply chain issues are resolved. It still expects its ADAS solutions to be installed in "more than an additional 266 million vehicles by 2030," while analysts expect its revenue to increase 29% this year and another 21% in 2023.
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 surged 467% in 2020 and another 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 inventories of its EyeQ chips from STMicro) to overcome supply chain constraints.
Nvidia: Still heavily exposed to two wobbly markets
Nvidia controlled 80% of the discrete GPU market in the second quarter of 2022, according to JPR. In its latest quarter, it generated a combined 91% of its revenue from the gaming and data center markets.
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 soaring usage of cloud-based services also prompted data centers to buy its high-end GPUs to process AI tasks more efficiently. That growth was amplified by rising cryptocurrency prices, which drove more people to mine cryptocurrencies with Nvidia's gaming and dedicated mining GPUs.
Nvidia's revenue and non-GAAP EPS surged 53% and 73%, respectively, in fiscal 2021 (which ended in January 2021). In fiscal 2022, its revenue rose 61% as its non-GAAP EPS increased another 78%.
But those tailwinds dissipated over the past year. PC sales withered, macro headwinds caused enterprise customers to postpone big cloud deals, and plummeting crypto prices prompted miners to flood the market with second-hand GPUs. The Biden administration also recently barred Nvidia from shipping its top-tier data center chips to China, which was already a soft spot due to China's pandemic lockdowns and video game playtime restrictions for minors.
As a result, Nvidia's revenue grew a mere 9% year over year in the first nine months of fiscal 2023 as its non-GAAP EPS tumbled 21%. Analysts expect its revenue to flatline for the full year and only rise 9% in fiscal 2024.
Nvidia is growing a lot slower than Mobileye, and its gaming and data center markets could remain wobbly for the foreseeable future. However, Nvidia is also firmly profitable on a GAAP basis -- which might make it a sturdier investment if interest rates keep rising.
The valuations and verdict
Neither of these stocks is a screaming bargain yet. Mobileye trades at 47 times forward earnings and 11 times next year's sales, while Nvidia trades 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 pick Mobileye because it's growing faster, it's mainly struggling with near-term supply chain issues instead of softening demand across its core markets like Nvidia, and it's more tightly focused on a single growing market.
Nvidia's still a solid long-term investment, but it deserves to trade at a lower valuation.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Intel and Nvidia. The Motley Fool recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short January 2025 $45 puts on Intel. The Motley Fool has a disclosure policy.