The demand for chips has increased dramatically in recent years as their applications have grown across a variety of industries. This rise in demand can be attributed to rapid technological breakthroughs, particularly in artificial intelligence (AI), self-driving cars, and the Internet of Things.
AI chip major NVIDIA Corp. (NVDA) is popular for its advanced chips that power AI, but its expensive valuation, growing competition, and strict regulations are lowering its appeal amongst investors. Therefore, investors could consider buying fundamentally strong chip stocks SMART Global Holdings, Inc. (SGH), Nikon Corporation (NINOY), and QUALCOMM Incorporated (QCOM) instead of NVDA.
Before diving deeper into the fundamentals of these stocks, let’s discuss what’s shaping the chip industry’s prospects and why this is not the right time to buy NVDA.
Semiconductors have become critical in today’s tech-driven world, helping enhance the performance and functionality of electronic devices. Chips power a variety of applications in sectors, including consumer electronics, healthcare, automobiles, and manufacturing.
IDC predicts a resurgence of the chip industry in 2024, driven by rebounding smartphone demand and rising demand for AI chips. The semiconductor market is expected to grow at an annual growth rate of more than 20%.
The global semiconductor market is estimated to grow at a CAGR of 8.8% to reach $1.31 trillion by 2032. Investors’ interest in semiconductor stocks is evident from the SPDR S&P Semiconductor ETF’s (XSD) 18.6% returns over the past year.
The global graphics processing unit (GPU) market is predicted to grow due to rising demand for high-performance computing, IoT trends, and sophisticated technologies such as AR, VR, and AI. The global GPU market is predicted to reach $110.6 billion by 2030, growing at a 22.5% CAGR.
Generative AI has been the primary driver for the outperformance of tech stocks since last year. Advanced GPUs are required to train generative AI programs. These advanced chips can use and process massive amounts of data needed to train generative AI programs rapidly and efficiently.
With the massive demand for generative AI, corporations are investing extensively in advanced chips. Deloitte has predicted that the market for specialized chips to power generative AI will be over $50 billion this year.
NVDA dominates the AI market with its advanced GPUs, controlling about 80% of the high-end AI chips. The company recently surpassed the $2 trillion market capitalization, becoming the third most valuable company in the United States. Demand for its H100 and A100 chips has skyrocketed.
However, Advanced Micro Devices, Inc. (AMD) has been gaining ground with its Radeon Instinct line of GPUs, offering competitive performance at a lower price point. Additionally, Intel Corporation (INTC) has also entered the AI market with its Nervana Neural Network Processors, providing more options for consumers and potentially disrupting Nvidia's dominance.
Moreover, its customers, such as OpenAI, Microsoft, Meta, Amazon, and Alphabet, are now developing their own custom chips for their needs. Moreover, export restrictions to China have hit NVDA’s China revenues, dropping 53% sequentially during the fourth quarter.
NVDA ended the year strongly by reporting that in its non-GAAP revenue in the fourth quarter rose 265.3% year-over-year to $22.10 billion. Its non-GAAP net income and non-GAAP EPS came in at $12.84 billion and $5.16 per share, up 490.6% and 486.4% from the prior year’s period, respectively.
However, the stock is trading at a significant premium valuation, which its financials may fail to justify. Its forward EV/Sales of 20.32x is 595.1% higher than the 2.92x industry average. Also, its forward Price/Sales of 20.46x is 596.8% higher than the industry average of 2.94x. Moreover, the stock’s forward EV/EBITDA of 32.03x is 108.8% higher than the industry average of 15.34x.
Considering these factors, let’s analyze the fundamentals of the three Semiconductor & Wireless Chip picks that are better than NVDA, beginning with the third choice.
Stock #3: SMART Global Holdings, Inc. (SGH)
SGH is a memory-focused company that engages in the designing and development of enterprise solutions in the United States, China, Europe, and internationally. It operates through Memory Solutions, Intelligent Platform Solutions, and LED Solutions segments.
SGH’s trailing-12-month Return on Total Capital of 3.89% is 58.6% higher than the industry average of 2.46%. Its 20.98% trailing-12-month leverage FCF margin is 132.4% higher than the 9.03% industry average. Also, its 2.73% trailing-12-month CAPEX/Sales is 18% higher than the 2.31% industry average.
During the first quarter, which ended on December 1, 2023, SGH’s total net sales came in at $274.25 million. The company’s non-GAAP gross profit came in at $91.28 million, and its operating income stood at $26.68 million.
In addition, its non-GAAP net income attributable to SGH came in at $12.54 million, and non-GAAP earnings per share came in at $0.24.
Street expects SGH’s EPS and revenue for fiscal 2025 to increase 78.5% and 24.7% year-over-year to $2.09 and $1.51 billion, respectively. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 50.1% to close the last trading session at $23.44.
SGH’s POWR Ratings reflect this promising outlook. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
SGH has an A grade for Momentum and a B for Value and Sentiment. Within the Semiconductor & Wireless Chip industry, it is ranked #16 out of 90 stocks. To see the additional ratings of SGH for Growth, Stability, and Quality, click here.
Stock #2: Nikon Corporation (NINOY)
Headquartered in Minato, Japan, NINOY manufactures and sells optical instruments in Japan, North America, Europe, China, Thailand, and internationally. It operates through the Imaging Products Business, Precision Equipment Business, Healthcare Business, Components Business, Industrial equipment, and other segments.
On March 7, 2024, NINOY announced that it has agreed to acquire 100% of the outstanding membership interests of RED.com, LLC (RED), resulting in RED becoming a wholly-owned subsidiary of Nikon.
This agreement was the result of Nikon and RED's shared desire to combine their strengths in order to meet the needs of their customers and deliver outstanding user experiences that go above and beyond their expectations.
NINOY’s trailing-12-month gross profit margin of 43.26% is 20.8% higher than the 35.80% industry average. Its trailing-12-month EBITDA margin of 10.91% is 1.2% higher than the 10.78% industry average. Additionally, its 4.26% trailing-12-month CAPEX/Sales is 40.2% higher than the 3.04% industry average.
NINOY’s revenue for the nine months that ended December 31, 2023, increased 16% year-over-year to ¥528.91 billion ($3.57 billion). Its gross profit rose 6.5% over the prior-year quarter to ¥229.94 billion ($1.55 billion). Also, the company’s profit for the period and EPS came in at ¥24.52 billion ($165.69 million) and ¥71.72, respectively.
For the quarter ending June 30, 2024, NINOY’s revenue is expected to increase 1.3% year-over-year to $1.12 billion. Over the past three months, the stock has gained 11.8% to close the last trading session at $10.55.
NINOY’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to a Buy in our proprietary rating system.
It is ranked #11 in the same industry. It has an A grade for Momentum and a B for Value and Stability. Click here to see the additional ratings of NINIOY for Growth, Sentiment, and Quality.
Stock #1: QUALCOMM Incorporated (QCOM)
QCOM develops and commercializes foundational technologies for the wireless industry worldwide. It operates through three segments: Qualcomm CDMA Technologies (QCT), Qualcomm Technology Licensing (QTL), and Qualcomm Strategic Initiatives (QSI).
QCOM’s trailing-12-month EBIT margin of 24.81% is 421.6% higher than the industry average of 4.76%. Its 37.63% trailing-12-month Return on Common Equity is significantly higher than the 3.12% industry average. Additionally, its 21.39% trailing-12-month net income margin is 728.2% higher than the 2.58% industry average.
For the fiscal first quarter that ended on December 24, 2023, QCOM’s total revenues amounted to $9.94 billion, up 5% year-over-year. Its operating income increased 18.8% year-over-year to $2.93 billion.
The company’s net income and EPS rose 23.7% and 24.2% year-over-year to $2.77 billion and $2.46, respectively.
Analysts expect QCOM’s EPS and revenue for the quarter ending March 31, 2024, to increase 7.2% and 0.4% year-over-year to $2.30 and $9.31 billion, respectively. It surpassed the consensus EPS estimates in three of the trailing four quarters. QCOM shares have gained 55.6% over the past six months, closing the last trading session at $173.08.
It’s no surprise that QCOM has an overall B rating, equating to a Buy in our POWR Ratings system.
It has a B grade for Momentum, Sentiment and Quality. It is ranked #4 in the Semiconductor & Wireless Chip industry.
Beyond what is stated above, we’ve also rated QCOM for Growth, Value, and Stability. Get all QCOM ratings here.
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QCOM shares were trading at $170.41 per share on Wednesday morning, down $2.67 (-1.54%). Year-to-date, QCOM has gained 18.42%, versus a 8.63% rise in the benchmark S&P 500 index during the same period.
About the Author: Rashmi Kumari
Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.
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