Memory chipmaker Micron (NASDAQ:MU) outperformed mobile chipmaker Qualcomm (NASDAQ:QCOM) by a mile over the past 12 months. Micron rallied over 140% during that period, while Qualcomm gained just 3%.
Last October, I compared Micron to Qualcomm, and concluded that Micron had more growth potential. Unfortunately, I didn’t take my own advice and buy any Micron shares. So today, I’ll take a fresh look at both stocks to see if Micron remains the better buy at current prices.
How Micron and Qualcomm make money
Micron is the fourth largest NAND manufacturer and the third largest DRAM manufacturer in the world. Samsung (NASDAQOTH:SSNLF) is the market leader in both categories.
To keep pace with its bigger rivals, Micron is developing faster memory technologies like 3D NAND and 3D Xpoint with Intel, and buying manufacturers like Inotera Memories. It also develops enterprise SSDs (solid-state drives) with Seagate, which counters Western Digital‘s acquisition of flash memory maker SanDisk.
Qualcomm is the biggest mobile chipmaker in the world. Its flagship Snapdragon SoCs (system on chips) bundle together application processors, GPUs, and baseband modems for mobile OEMs. Qualcomm has been diversifying that business into adjacent markets like wearables, drones, cars, and other Internet of Things (IoT) devices.
Qualcomm’s chipmaking business generates most of its revenue, but the lion’s share of its profits comes from its higher-margin licensing business — which leverages its portfolio of wireless patents to earn a cut of each connected device sold worldwide.
Which chipmaker is growing faster?
A global shortage of memory chips, which boosted market prices over the past year, has been a major tailwind for Micron. That’s why Wall Street expects Micron’s revenue to rise 62% this year, and for its earnings to surge from $0.06 per share last year to $4.71 this year.
However, investors should note that Micron’s growth is cyclical. As year-over-year comparisons cool off, Micron’s revenue and earnings are expected to respectively rise 12% and 28% next year. Those are still solid numbers, but investors should be mindful of two potential threats — tougher competition from market leaders like Samsung, and the possibility of Chinese chipmakers flooding the market with cheaper memory chips.
Meanwhile, Qualcomm faces tough headwinds. It chipmaking business is ceding market share to cheaper rivals like MediaTek, as well as first-party chips from big OEMs like Samsung and Huawei. Its licensing business is besieged by regulators, rivals, and customers — which all claim that Qualcomm’s licensing practices are anti-competitive.
That’s why analysts expect Qualcomm’s revenue and earnings to respectively fall 4% and 5% this year. Its growth is expected to remain negative next year. But there are glimmers of hope on the horizon — it could diversify away from mobile chips, and its planned acquisition of NXP Semiconductors (NASDAQ:NXPI) would further diversify its business and make it the biggest automotive chipmaker in the world.
Dividends and valuations
Micron has never paid a dividend, and it has no plans to do so in the near future. That’s because it’s likely smarter for Micron to reinvest its cash into new memory products to widen its moat.
Qualcomm pays a forward yield of 4%, and it’s raised that payout annually for 12 straight years. It spent 56% of its free cash flow on that dividend over the past 12 months, so it has plenty of room for future hikes.
But even after its massive rally, Micron looks surprisingly cheap at 14 times earnings compared to the industry average P/E of 15 for memory chipmakers. Its forward P/E of 5 looks even cheaper.
Qualcomm trades at 19 times earnings, which is lower than the industry average of 25 for semiconductor makers. Its forward P/E of 12 (which doesn’t account for the NXP acquisition) also looks fairly cheap.
The verdict: Micron wins again
Micron is firing on all cylinders, its stock is cheap, and industry tailwinds should propel it to new highs. The only real risk to Micron is an abrupt decline in demand for memory chips — but that seems unlikely with the PC market finally warming up.
Qualcomm remains stuck between a rock and a hard place. I don’t see the stock declining much more, thanks to its high dividend and low valuation, but its future depends heavily on its ability to close the NXP deal. So for now, Micron still has much more upside potential than Qualcomm at current prices.