NVIDIA Corporation (NVDA), QUALCOMM, Inc. (QCOM): What Is the Best Semiconductor Strategy?

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NVIDIA Corporation (NASDAQ:NVDA) is definitely on its way to becoming more profitable as the company announced in a recent press release that it would be licensing its GPU cores, and visual computing patent portfolio to device manufacturers.

The likely beneficiaries are the device manufacturers, NVIDIA, and pure-play foundries like Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM).

NVIDIA Corporation (NASDAQ:NVDA)

Growing gross margins for NVIDIA

Source: Ycharts

Over the past ten-years, NVIDIA has been able to grow its gross margins from 30% to 52.94%. The pursuit of a license driven business model is what is causing the rapid growth in gross margins.

QUALCOMM, Inc. (NASDAQ:QCOM)’s licensing revenues grew Qualcomm’s gross profit margins in the past five-years, similar to NVIDIA. Comparatively, Qualcomm has a 62.25% gross profit margin, so it is definitely possible for NVIDIA Corporation (NASDAQ:NVDA) to maximize profitability better with the added licensing of its GPU cores, and visual computing patent portfolio.

QUALCOMM, Inc. (NASDAQ:QCOMprojects that the number of machine-to-machine communication opportunities will increase to 50 billion machines and 100 billion objects. So going forward it is highly practical for NVIDIA Corporation (NASDAQ:NVDA) to openly license its graphics technologies out to any company that can find a practical use for them. After all, it is highly probable that the number of objects with a screen will grow, and device manufacturers being able to have access to the world’s most advanced graphics patent portfolio could only help. Almost anything with a screen could use an NVIDIA graphics processor.

NVIDIA: the sky is the limit

NVIDIA has a set of core-businesses that it can rely on for growth, and it currently estimates that the total addressable market (total market value for each of these businesses) is around $26 billion. In the current fiscal year NVIDIA Corporation (NASDAQ:NVDA) generated $4.3 billion in revenue, so it composes a small, yet respectable corner of the various markets it operates in.

The company is currently split into mobile ($10 billion addressable market), NVIDIA GRID (a brand for its cloud-virtualization graphics solutions, and it also has a $10 billion addressable market), and its GPU segment ($6 billion addressable market). The company’s potential growth opportunities primarily involve its NVIDIA GRID segment and mobility.

There’s also the future licensing revenue stream for unique graphics driven processes that are most likely to come from machine-to-machine communication, which is a 50 billion unit market that has yet to be addressed.

Analysts on a consensus basis anticipate this company to grow earnings by 12% on average over the next  five years. The company’s growth will most likely be driven by mobile and GRID. However, I don’t anticipate any upside surprises over the short-term as the company has not been able to deliver a Tegra 4 design win against Qualcomm Snapdragon 800.

The company currently pays a 2.08% dividend yield and is fairly valued at a 15.5 earnings multiple when considering the fact that there’s no near-term upside catalyst.

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