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Why Nvidia (NVDA) Has Overtaken Intel (INTC) as the Top Chip Stock

The financial media loves a good Bad News Bears story, where the newcomer, who shouldn’t have left the playground, plays harder and better and wins the game. That’s why they’ve gone crazy over the story of Tesla’s (TSLA) market value soaring past traditional automakers such as Toyota, GM and Ford, or some combination of them.

But recently, a supercharged chip designer Nvidia’s (NVDA) market value surpassed semiconductor stalwart Intel (INTC) with nary a notice.

The latter might tell you more about both the market and technology in America. It also begs the question: if you had to choose only one of INTC vs. NVDA, which is the better semiconductor stock?

What exactly are semiconductors?

Semiconductors are crucial and the most strategically important technology because they are the materials and circuitry needed to produce microchips that are at the heart of everything from smartphones to advanced satellites. You might think of these microchips as the brains inside all advanced technology.

Semiconductor chips are in the spotlight because one of the areas that China is still relatively behind in is advanced chip technology, which runs across chip design, computer software and equipment. Washington’s chief concern is that while many of the advanced chips are designed in America, only around 12% of all chips are manufactured here, and they tend to be the less advanced chips produced in older plants.

How Nvidia surged beyond an industry giant

Nvidia is riding the demand for the more high performance chips used in gaming. The company also expanded into data centers, recently closing on its $7 billion acquisition of Mellanox Technologies. NVDA is also gaining market share in artificial intelligence (AI)-focused chips and in cloud computing. These are all profitable, big growth areas that prompted earnings to surge 113%, and pushed NVDA stock up 194% year-over-year. That surge pushed Nvidia past Intel in market value, as INTC stock has gone the other way.

It is important to note that Nvidia only designs its advanced chips, outsourcing production primarily to Taiwan Semiconductor (TSM), which fabricates more than half of the world’s chips.

What happened to Intel?

Intel is a different animal than Nvidia in a few ways. First, it produces semiconductor chips for a much broader array of industries while still dominating its core PC and data-center markets. Intel has nine manufacturing facilities around the world leading to a reported $58 billion in net property, plants and equipment. Plus, being in business since 1969 has netted substantial intellectual property of manufacturing semiconductors.

Despite this experience, Intel has publicly stumbled in terms of the next-generation chip manufacturing process known as 7-nanometer technology, referring to the size of the transistors it produces. Chips that use smaller transistors can run more efficiently and use up less physical space.

This led the company to shake up its technology team overseeing its manufacturing operations, and it’s considering outsourcing more to foundries like Taiwan Semiconductor.

As you might guess, all this hit Intel stock pretty hard so that its stock is up only 5% year-over-year, woefully underperforming Nvidia.

Which is a better buy? Intel or Nvidia?

It seems a no-brainer to go with Nvidia over Intel since NVDA seems to have unbeatable momentum in this critical industry at the heart of advanced technology.

This market doesn’t pay much attention to fundamentals and valuations but consider this: Nvidia stock is trading at 84 times earnings while Intel is trading at 9 times earnings. And despite Intel’s stumble on advanced chip plans, INTC still delivered a return on equity of 33% and earnings growth of 22% in its last quarter.

Now consider geopolitical risks. The chief risk for Nvidia is its dependence on Taiwan Semiconductor for production. Taiwan Semiconductor is a powerful company in a strategically important place so it has to diplomatically balance both customers and countries. For example, roughly 14% of its sales go to Huawei and the U.S. Commerce Department announced that companies would require licenses for sales to Huawei of semiconductors made abroad with U.S. technology. How will this impact Taiwan Semiconductors and its relationship with Nvidia?

And don’t forget another Washington factor. Intel’s stumble came just as the U.S. Senate and House of Representatives were considering a bill that will financially support domestic chip production. The final bill lays out a framework for $25 billion worth of direct incentives to stimulate investment in manufacturing capacity, along with advanced research.

Which stock to buy now depends on your time frame. Momentum traders should go with Nvidia stock. But if you’re looking out 6-12 months or more, I would go with Intel.

Like any stock, chip and semiconductor stocks rely on a variety of factors to profit. Similarly, you may find that safer, slower profits are more to your liking that quick, but riskier profits.