NVIDIA vs. ON Semiconductor: Which Chip Stock is a Better Buy?

Santa Clara, Calif.-based NVIDIA Corporation (NVDA) operates as a visual computing company worldwide. It operates in two segments: Graphics and Compute & Networking. It designs systems on chip units (SoCs) for the mobile computing and automotive market. In comparison, ON Semiconductor Corporation (ON) manufactures semiconductor components for various electronic devices worldwide. The Phoenix, Ariz., company operates in three segments: Power Solutions Group (PSG); Advanced Solutions Group (ASG); and Intelligent Sensing Group (ISG).

Robust demand and solid revenue growth have motivated semiconductor companies to invest in strategic plans to upgrade their production capacity, which could potentially ease the chip shortage in the near term. The governments of several countries are also investing in the industry to help increase production.

According to the Semiconductor Industry Association (SIA), sales during the second quarter of 2021 were $133.6 billion, up 29.2% year-over-year. Furthermore, the World Semiconductor Trade Statistics (WSTS) organization projects the worldwide semiconductor market to grow 25.1% year-over-year to $551 billion in 2021.

The industry’s robust potential is evident in the significant rise in the second quarter sales and optimistic analysts’ expectations. Both NVDA and ON are well-known players in the industry and are expected to gain substantially from the industry’s growth.

NVDA’s shares have gained 49% in price over the past six months, while ON has returned 5.7% over the period. Also, NVDA’s 61.4% gains year-to-date compare with ON’s 38.7% returns. And in terms of their past year’s performance, ON is the clear winner with 94.4% gains versus NVDA’s 50.9%.

But which stock is a better buy now? Let’s find out.

Click here to checkout our Semiconductor Industry Report for 2021

Latest Developments

NVDA announced the extension of its collaboration with Lenovo Group Limited (LNVGY) on October 5, aiming to modernize enterprise data centers with the security and performance of NVIDIA® BlueField® data processing units. “Lenovo’s collaboration in our Project Monterey early access program is a key step in allowing enterprises to embrace AI’s transformational benefits while tackling security and performance challenges,” said Justin Boitano, vice president and general manager of Enterprise and Edge Computing at NVIDIA.

Also this month, ON announced the availability of a new 8.3 MP CMOS digital image sensor with a rolling shutter and embedded High Dynamic Range (eHDR) technology. This advanced sensor should see wide demand with an array of versatile features, particularly in customer projects with HDR requirements.

Recent Financial Results

NVDA’s revenues increased 68% year-over-year to a record $6.51 billion in its fiscal second quarter, ended August 1. Its operating income stood at $2.44 billion, up 275% from the same period last year. Its non-GAAP net income grew 92% from its year-ago value to $2.62 billion. And the company’s non-GAAP EPS increased 89% year-over-year to $1.04.

For the second quarter ended July 2, ON reported record revenue of $1.67 billion, reflecting a 37.6% year-over-year increase. Its operating income grew 554.8% from its year-ago value to $282.20 million, while non-GAAP net income attributable to the company improved 449.4% year-over-year to $275.80 million. The company’s non-GAAP EPS improved 425% year-over-year to $0.63.

Past and Expected Financial Performance

NVDA’s revenues and EBITDA grew at CAGRs of 22.6% and 22.3%, respectively, over the past three years. Analysts expect NVDA’s revenue to increase 44.2% in the current quarter, 54.5% in the current year, and 12.8% in the next year. The company’s EPS is expected to grow 50.7% in the current quarter, 65.6% in the current year, and 13% in the next year. Also, its EPS is expected to grow 32.6% per annum over the next five years.

In comparison, ON’s revenues and EBITDA grew at CAGRs of 1.8% and 2.7%, respectively, over the past three years. Analysts expect the company’s revenue to increase 18.7% in the current quarter, 25.3% in the current year, and 5.4% in the next year. The company’s EPS is expected to grow 114.3% in the current quarter, 190.6% in the current year, and 10.9% in the next year. And ON’s EPS is expected to grow 51.4% per annum over the next five years.

Profitability

NVDA is more profitable, with gross profit and EBITDA margins of 63.76% and 38.76%, respectively, compared to ON’s 34.95% and 22.96%.

Furthermore, NVDA’s ROE, ROA, and ROTC of 40.38%, 14.36%, and 16.50%, respectively, compare with ON’s 14.88%, 5.12%, and 6.10%.

Thus, NVDA is more profitable here.

Valuation

In terms of forward EV/Sales, NVDA is currently trading at 19.79x, which is 83.5% higher than ON’s 3.26x. Also, NVDA’s GAAP forward P/E ratio of 63.21 is 61.4% higher than ON’s 24.37.

Thus, ON is relatively affordable here.

POWR Ratings

ON has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. In comparison, NVDA has an overall C rating, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Both stocks have a Growth grade of B, which is consistent with their stable rise in financials in the latest quarter.

ON has a B grade for Value, which is justified because its 18.42 non-GAAP forward P/E ratio is 25% lower than the 24.55 industry average. In contrast, NVDA has a D grade for Value. Its 51.95 non-GAAP forward P/E ratio is 111.6% higher than the industry average.

Of 97 stocks in the B-rated Semiconductor & Wireless Chip industry, ON is ranked #40, while NVDA is ranked #61.

Beyond what we’ve stated above, we have also rated the stocks for Stability, Momentum, Quality, and Sentiments. Click here to view ON ratings. Also, get all NVDA ratings here.

The Winner

The global semiconductor shortage has been a concern for several months now, but the market is rebounding, reflected in solid second-quarter sales growth and bullish analysts’ expectations. Both NVDA and ON should benefit from the favorable backdrop. However, we think its lower valuation makes ON a better pick here.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Semiconductor & Wireless Chip industry here.

Click here to checkout our Semiconductor Industry Report for 2021

NVDA shares were trading at $209.77 per share on Monday morning, up $1.46 (+0.70%). Year-to-date, NVDA has gained 60.77%, versus a 18.75% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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