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Better Buy: NVIDIA Corporation vs. Cypress Semiconductor

Leo Sun, The Motley Fool

Many semiconductor stocks rallied strongly over the past year, fueled by robust demand for chips across various industries. That's why the Philadelphia Semiconductor Index advanced 32% over the past 12 months, easily beating the S&P 500's 14% gain.

Two strong performers in that sector are NVIDIA (NASDAQ: NVDA) and Cypress Semiconductor (NASDAQ: CY), which rallied 75% and 35%, respectively, during that period. Let's take a fresh look at both chip stocks to see which is the better buy today.

A bear clashes with a bull.

Image source: Getty Images.

What do NVIDIA and Cypress do?

NVIDIA is the world's largest producer of discrete GPUs. It controlled nearly two-thirds of that market during the first quarter of 2018, according to research firm JPR. Most of NVIDIA's GPUs are designed for PC gaming, but it also sells higher-end GPUs for professional visualization and data centers -- where they're used for machine learning purposes.

NVIDIA also sells ARM-based Tegra CPUs, which power connected cars, its Shield devices, and the Nintendo Switch. In addition it produces Drive PX, a series of onboard "supercomputers" for cars for autonomous driving.

Cypress is the world's largest producer of Wi-Fi/Bluetooth combo chips, auto instrument cluster microcontrollers, auto NOR flash memory chips, SRAM memory chips, and USB-C controllers. Most of its growth comes from the automotive and industrial markets.

Cypress built much of its business through acquisitions. Its merger with Spansion in 2015 formed the foundation of its flash memory and microcontroller business, and its acquisition of Broadcom's wireless Internet of Things (IoT) business in 2016 expanded its reach into Wi-Fi/Bluetooth chips.

Which chipmaker is growing faster?

NVIDIA's revenue rose 41% to $9.71 billion last year, mainly due to strong demand for gaming and data center GPUs. Wall Street expects that momentum to continue with 35% sales growth this year.

On the bottom line, NVIDIA's GAAP EPS jumped 88% to $4.82 per share last year. Analysts expect its earnings to rise another 51% this year.

NVIDIA's Drive platform.

Image source: NVIDIA.

Cypress' revenue rose 21% to $2.33 billion last year, thanks to the Broadcom deal and strong demand for its IoT and automotive chips. But for the current year, analysts anticipate just 7% sales growth as the year-over-year boost from the aforementioned deal fades.

Cypress was unprofitable on a GAAP basis in 2017, mainly due to the Broadcom deal. But on a non-GAAP basis, its earnings climbed 82% to $0.89 per share. Wall Street expects that figure to climb another 39% this year.

Understanding the headwinds

NVIDIA is growing at a faster pace than Cypress, but it also faces tougher headwinds. New AMD GPUs, mainly aimed at the low-end market, could throttle its gaming growth. The collapse of cryptocurrency prices could cause used GPUs to flood the market and reduce demand for newer cards.

Intel's (NASDAQ: INTC) development of its own discrete GPU, along with its recent launch of a combo CPU/GPU chipset (Kaby Lake G) with AMD, could also impact NVIDIA's long-term growth. Lastly, NVIDIA's stock isn't cheap at 36 times this year's earnings -- and its paltry forward yield of 0.2% doesn't offer much downside protection.

Cypress' advantage is that it leads niche markets, and it bundles many of those products together to lock in customers and gain content share in industrial machines, cars, and other devices. Cypress' main growth strategy, called "Cypress 3.0," is to become a one-stop shop for IoT embedded solutions.

Cypress doesn't face many direct threats, but macro slowdowns across the automotive and industrial IoT markets could derail its growth. However, Cypress' stock is fairly cheap at 14 times this year's earnings, and its forward yield of 2.6% could attract income investors.

The winner: Cypress Semiconductor

I believe NVIDIA's leading position in gaming, data centers, and autonomous driving will drive the stock higher over the long term. But for now, Cypress' milder headwinds, lower valuation, and higher dividend make it the safer buy.

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Leo Sun owns shares of Cypress Semiconductor. The Motley Fool owns shares of and recommends Nvidia. The Motley Fool recommends Broadcom Ltd and Cypress Semiconductor. The Motley Fool has a disclosure policy.