Better buy: NVIDIA vs. Qualcomm

These two chip companies have loads of long-term potential.

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This article was originally published on All figures quoted in US dollars unless otherwise stated.

If you're in the market for an investment in the chip industry, you've likely considered powerhouse players Qualcomm Inc (NASDAQ: QCOM) and NVIDIA Corporation (NASDAQ: NVDA). The former has a long history dominating the cellular chip space, and the latter is currently a leader in the graphics processing unit (GPU) market. 

Both tech companies are positioning themselves to benefit from long-term chip trends, but which is a better buy right now? Let's take a closer look at what each is doing to grow its business to find out. 

The case for Qualcomm 

Qualcomm's bread and butter for many years has been the company's long list of 3G and 4G patents that it collected royalties on from device makers. Qualcomm was involved in several years-long battles with other tech companies over how much it receives for its patent royalties, but much of that has been settled now. 

The company's chip business is still alive and well and sales to device makers, including Apple, Samsung, and Xiaomi, account for about three-quarters of the company's total revenue. The rest of the company's sales come from its licensing business, which still brings in most of Qualcomm's profit. 

Qualcomm is banking on the next wave of cellular devices, 5G smartphones, as a potential catalyst for its business. While 5G could take a few years to fully take off, Qualcomm already has 110 5G agreements with smartphone makers and all of the major handset manufacturers for its 5G licensing. 

Qualcomm is optimistic that 5G could boost its business because it estimates that the number of 5G-enabled smartphones will grow 150% this year. 

The case for NVIDIA

NVIDIA's core business is designing graphics processors for gaming and data centers. The company's GPUs do a fantastic job of processing images and graphics quickly, which makes them great for gaming and for artificial intelligence processing as well. 

Tech companies are increasingly needing to use GPUs to help assist other processors and, as a result, NVIDIA's data center sales grew an astonishing 162% in the most recent quarter (reported on Nov. 18). Meanwhile, NVIDIA's GPU sales in the gaming market continue to grow as well. The company's gaming segment revenue grew 37% in the most recent quarter and still represents 48% of the company's total sales.

The long-term opportunities for NVIDIA come from the ways its chips can be used by other tech companies and its current market position over competitors like Advanced Micro Devices. Not only is NVIDIA a GPU leader, but its chips are tapping into long-term growth trends in gaming, AI cloud computing, and 5G data centers. 

The global GPU market was worth an estimated $19.8 billion in 2019 but will balloon to $200 billion by 2027. With NVIDIA already tapping into key markets and leading its rival in the GPU space, the tech giant is well-positioned to continue growing. 

The verdict: Buy NVIDIA 

While Qualcomm certainly has some potential to be a good investment, NVIDIA's diversification of its GPU business across data centers, gaming, and future tech (think driverless cars) makes the company a better long-term bet. On top of that, NVIDIA's core businesses are performing well and providing stability for the company as it pursues new revenue opportunities. All of this gives NVIDIA an edge over Qualcomm in this match-up.

This article was originally published on All figures quoted in US dollars unless otherwise stated.

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Chris Neiger has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Apple, NVIDIA, and Qualcomm. The Motley Fool Australia has recommended Apple and NVIDIA. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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