Masayoshi Son recently suggested that investors are not pricing in Nvidia’s future opportunities in the AI market.
In my eyes, the most critical piece of infrastructure powering artificial intelligence (AI) is semiconductors. From storage to memory, quantum computing, machine learning, and a host of other generative AI applications, semiconductors represent the backbone supporting the broader AI thesis.
If you’ve been following chipmakers over the last couple of years, then you will find it no surprise that Nvidia (NVDA 4.89%) has emerged as the most influential company in the AI realm. And yet despite its shares gaining 752% in just the last two years, famed investor Masayoshi Son of SoftBank recently proclaimed that Nvidia stock is undervalued.
Son’s logic was that the total addressable market (TAM) for generative AI is expected to witness robust growth over the next several years. Not only is this an obvious tailwind for Nvidia, but the company’s industry-leading roster of graphics processing units (GPU) architecture separates it from the competition in a considerable way; therefore, Nvidia may actually be able to acquire the majority of incremental market share that Son is projecting. Should this be the case, Nvidia stock looks like a no-brainer.
While Son could be correct, I’m not allowing Nvidia’s dominance to overshadow other opportunities in the chip space. Below, I’m going to detail why I see Qualcomm (QCOM 0.13%) as an alternative to investing in Nvidia, and one that I think is a better opportunity right now.
Qualcomm is quietly emerging as an AI star
Although Qualcomm is a semiconductor company, its underlying business is quite different to that of Nvidia. Nvidia specializes in making GPUs that are used for generative AI development. By contrast, Qualcomm’s Snapdragon architecture is primarily focused on powering mobile phones or even Internet of Things (IoT) devices.
For the company’s fiscal year (ended Sept. 29), Qualcomm generated $38.9 billion in revenue — up just 9% year over year. While this level of growth might seem uninspiring, keep in mind that Qualcomm has spent the last several quarters in turnaround mode — underscored by cost-cutting efforts and reigniting growth in its core handsets (phone) business.
In my eyes, Qualcomm’s efforts are starting to bear fruit. While revenue only grew in the low single digits during the first half of fiscal 2024, Qualcomm demonstrated an impressive turnaround in the second half as sales rose by 11% during the third quarter and by 19% in the fourth quarter.
On top of that, Qualcomm’s net income and earnings per share (EPS) both increased by 40% year over year in fiscal 2024. I’ll take mundane revenue growth in exchange for this level of profitability growth any day. And what’s even better is how Qualcomm will be allocating some of this newfound profit.
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15 billion reasons to love Qualcomm stock right now
As part of its recent earnings report, Qualcomm’s management announced that the company’s board of directors approved a $15 billion stock buyback program. I like this idea, and I find this move as an enticing way to deploy some of the company’s excess cash flow in a way that rewards shareholders.
Is Qualcomm stock a buy right now?
In the chart below, I’ve benchmarked Qualcomm against a peer set of other semiconductor stocks using the forward price-to-earnings (P/E) multiple. I see the forward P/E as a useful benchmark because it can help indicate how a company’s outlook is perceived relative to its peers. With a forward P/E of just 14.3, investors appear to be placing a considerable discount on Qualcomm’s growth prospects when compared to many of its cohorts.
QCOM PE Ratio (Forward) data by YCharts
Fundamentally speaking, the valuation trends illustrated in the chart would suggest that Qualcomm could be seen as an undervalued opportunity among the broader semiconductor stock landscape. When you combine the new $15 billion share repurchase program on top of these trends, I tend to think that Qualcomm’s management sees this dynamic and believes the stock is undervalued.
While Son’s assessment of Nvidia’s potential could be accurate, I see Qualcomm stock as a more compelling opportunity right now given its valuation disparity compared to peers. To me, Qualcomm is trading at a bargain and I think the stock is a no-brainer right now for investors with a long-term time horizon.
Adam Spatacco has positions in Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Intel, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.