Silicon is the seventh most abundant element found on earth. And yet, it is one of the most valuable of elements when it comes to the modern economy. Not much can work without it — especially not chip stocks. Trillions of dollars have been generated thanks to taking this common stuff and a version of modern alchemy making it into commercial “gold”.
By “gold,” I mean computer chips that are ubiquitous, found in nearly everything from toasters to cars — and of course, the modern umbilical cord known as the smartphone. Chip stocks like Intel (NASDAQ:INTC) and Nvidia (NASDAQ:NVDA) have also turned themselves into gold for investors. Nvidia came to the market in October of 2000 and since then has generated a return of 1,059.25%, however most of that has come from 2016 on. Intel came to the market in October of 1971 and since 1989 has generated a return of 7,818.30%. Over the last three years, however, the return has been around 40%, absolutely respectable, but nowhere near NVDA’s returns.
So, Nvidia is the upstart among chip stocks. Yet, over the past three years, NVDA has mopped the floor with INTC shares. And how and why did this happen?
One word: Bitcoin.
NVDA Rode the Crypto Wave
Bitcoin and its myriad of copycat crypto coins rely on heavy computing power to solve for complex algorithms to create or mine the coins. And these are heavily dependent on graphic processing units or GPUs. Nvidia carved out a big chunk of the GPU market — along with Advanced Micro Devices (NASDAQ:AMD).
This surge in demand for GPUs actually resulted in GPU shortages, providing Nvidia with windfalls. However, like with most manias from tulips to dot-coms, they eventually pass. And this is one of the reasons that NVDA stock was particularly punished during the Red October and Negative November markets.
GPUs have other purposes in life beyond coin mining. They plug into gaming consoles and are vital to artificial intelligence as well as in supercomputers as well as in autonomous cars. So, the company has a future for its products which are 85% or more of its revenues.
While Nvidia is the recent fallen star — Intel still is the champ for all microprocessors controlling 90% of the globe’s market. It makes central processing units (CPUs) that control the operations of devices and GPUs. And the company also makes GPUs as well as other electronic bits from flash memory to digital imaging gear and parts for networks and communications setups.
So, it’s not surprising that Intel has held on a bit better since October 1, and for the trailing year it is positive for investors with a return of 8.22% compared to Nvidia’s net loss of 32.15%.
Advantages for INTC Over NVDA
One of the biggest differences between Intel and Nvidia is that Intel actually makes products — while Nvidia merely outsources. It relies on two companies for the bulk of its GPUs and related bits. Taiwan Semiconductor (NYSE:TSM) and Samsung make the units for the company. And a handful of other companies do some additional packaging and assembly for Nvidia, including Hon Hai known as Foxconn.
This brings up a pending problem. The U.S. government has many rules restricting sales of technology goods to non-U.S. customers. And with trade negotiations or trade tirades underway, there are threats of cutting off some countries from more US technology goods particularly to China. Nvidia with 70% of its customers in Asia and a significant portion of that base in China is significantly at risk.
In particular, China’s super computer known as Tianhe-1A (which is the world’s fastest computer) relies on 7,168 of Nvidia’s GPUs. And despite those being made in Taiwan and South Korea might be restricted.
This could play out very poorly for Nvidia’s shareholders. For if they are cut off, their outsource companies could simply be re-contracted by a re-configured Nvidia that could simply change its domicile of ownership. And if we play out some chess plays — the U.S. patent office could simply cancel out the companies’ patents.
But Intel could more easily shift operations given its own bases of production and assemblies.
Then there are the divergent focuses on shareholders. Intel pays a dividend that’s ahead of the average of the S&P 500 at 2.52% and has been rising in distribution by an annual average of 5.92% over the past five years. Nvidia pays barely anything, with a yield of 0.44% which was upped by a penny over the past year to 16 cents.
The Bottom Line for Chip Stocks
I like the diversity of Intel’s product mix and production capabilities and why I have it in my Profitable Investing model portfolios. And I’d continue to avoid Nvidia given the changes in the market for GPUs, the competition including from Intel for GPUs and the lack of production capabilities. And of course, the much higher levels of political risk in Nvidia.
Neil George is the editor of Profitable Investing and does not have any holdings in the securities mentioned above.