Investor Insights:
Chipmakers offer exposure to many of the biggest tech trends, including automation, drones and artificial intelligence.
And with the phase 1 U.S.-China trade deal easing tariffs on the global semiconductor market, now is a great time to add one of these companies to your portfolio.
The big question is: Which one do you buy?
One major chipmaker, Intel Corp. (Nasdaq: INTC), has grabbed the attention of many investors recently. At roughly $60 per share, its trading at its highest level since the 2000 dot-com boom.
Intels next earnings release is on Thursday this week. Analysts expect the company to post earnings of $4.61 a share for 2019.
A price-to-earnings (P/E) ratio is a great way to quickly gauge investors expectations of growth and the price theyll pay for a stock.
If we take Intels current stock price and divide it by its 2019 earnings estimate, we get a P/E ratio of roughly 13.
A P/E of 13 means investors are happy to buy Intels shares on the expectation that the chipmakers profits will grow at roughly 13% over the next few years.
By looking at analysts profit forecasts for the company though, we can see thats not the case.
Wall Street expects the chipmaker to generate less than 1% growth in profits for 2020 and stagnate at that level again in 2021. [1]
That means investors are paying too much to own Intels stock.
I think its likely Intels shares will stay stuck at this level or decline back to the mid-$40s, a decline of 25% to 30%.
On the other hand, theres another chipmaker that has a much different story to tell.
Nvidia Corp. (Nasdaq: NVDA), in my view, offers us much more growth and value than Intel does.
And based on NVDAs recent gains, many investors seem to agree with me.
Investors Are Favoring Nvidia Over Intel in Recent Months
(Source: TradingView.com)
For one, the shares still trade about 13% below the chipmakers all-time high price of $280 a share, set roughly 16 months ago.
And earnings growth is about to accelerate, rather than stagnate like with Intel.
Wall Street analysts expect the chipmaker to earn $5.55 a share in 2020. In 2021, they see profits rising 30% higher, to $7.22 a share.
If we divide the 2021 figure using Nvidias share price of $248, we get a P/E ratio of 34. In other words, investors are saying they expect the chipmakers profits to grow at 34% a year.
So with Nvidia, the current price of the stock is entirely appropriate.
In fact, given the pace of earnings growth, I could argue that investors should be paying at least a small premium a P/E ratio of 45 to own the stock.
By that metric, we could easily see another 30% rise in Nvidias shares over the next 18 months or so.
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