Optimal Semiconductor Investment: Wolfspeed versus Nvidia (rephrased)
Optimal Semiconductor Investment: Wolfspeed versus Nvidia (rephrased)
Semiconductor sales are soaring due to the ongoing trends of artificial intelligence (AI) and electric vehicles (EVs). The semiconductor market is projected to surpass $600 billion in 2024 and reach $1 trillion by 2030, making investing in chip companies an excellent opportunity to capitalize on this growth.
Two notable semiconductor companies to think about are Wolfspeed (WOLF -7.41%) and Nvidia (NVDA 0.35%). Wolfspeed dominates around 50% of the silicon carbide (SiC) wafer sector, while Nvidia garnered attention with its stock skyrocketing over 170% in 2024, up until Dec. 13, thanks to its commanding position in AI semiconductors.
Both companies have intriguing technologies that make them appealing investment options. Let's examine Wolfspeed and Nvidia to help you decide which semiconductor stock is the superior choice for the long-term.
Assessing Wolfspeed
Wolfspeed's focus on SiC makes it an engaging investment choice. The company pioneered commercial SiC wafers in 1991. SiC offers numerous advantages over the silicon commonly used in the semiconductor industry, particularly for EVs, enabling vehicles to travel further and reduce charging time.
Wolfspeed expects its SiC sales to eventually reach $3 billion in annual revenue as the EV market expands. In its 2024 fiscal year, which ended June 30, sales amounted to $807.2 million.
SiC's promise is evident, but the company faces challenges irrefutably. It is working on increasing production at its SiC manufacturing plants, but the costs are significant.
For instance, in its first quarter, ended Sept. 29, sales reached $194.7 million, but the cost of revenue was a hefty $230.9 million. As a result, Wolfspeed reported a loss of $36.2 million in gross profit at the end of fiscal 2024.
Moreover, the company is experiencing a cyclical downturn, leading to weaker sales. Its first-quarter revenue of $194.7 million was lower than the previous year's $197.4 million. The decrease in sales, lack of profitability, and high production costs contributed to the resignation of Wolfspeed's CEO in November.
Analyzing Nvidia
The rise of AI has transformed Nvidia into a dominant semiconductor player. It is currently the leading semiconductor company in terms of market cap.
CEO Jensen Huang anticipated the need for accelerated computing in 1999 and launched the graphics processing unit (GPU). Accelerated computing uses a specialized processor to tackle intense tasks, such as data processing carried out by AI systems, instead of relying on a CPU to handle everything.
This pioneering work in GPUs set the stage for the company to record significant sales within the cloud computing industry, where AI systems reside. In its third fiscal quarter, which ended Oct. 27, Nvidia's revenue reached a record $35.1 billion, showing an impressive 94% increase year over year. This resulted in a quarterly gross profit of $26.2 billion, more than doubling the prior year's $13.4 billion.
Nvidia's AI-focused products are just scratching the surface. The company is introducing its new computing architecture, named Blackwell. This platform, according to management, "pushes the boundaries of scientific computing." It has the potential to become a major revenue driver for the company.
Huang mentioned that previous systems were trained on existing human-generated data, but now, AI is beginning to learn from synthetically produced content. This necessitates more computing power, which Blackwell provides. "And so, we're seeing a lot of demand from various sources," Huang said, implying that there remains strong demand for Nvidia's products in the realm of AI.
Selecting between Wolfspeed and Nvidia
In the battle between Wolfspeed and Nvidia, the latter's powerful sales, impressive profitability, and continuing demand seem to favor it as the preferred choice between these two semiconductor titans. However, the valuation of shares is another critical factor to consider.
Comparing Wolfspeed and Nvidia using the price-to-sales ratio (P/S), a metric that quantifies how much investors are prepared to pay for each dollar of sales, is enlightening.
Wolfspeed's recent challenges have caused its stock to plummet by more than 80% through Dec. 13. Consequently, its P/S has reached its lowest value in years. Nvidia's P/S, on the other hand, has increased thanks to its AI success.
As a result, Wolfspeed stock appears to be the better value, with the potential for greater upside in the long run, if the company can overcome its current hurdles. However, due to the numerous challenges it faces, only aggressive investors should consider buying shares.
For others, Nvidia's success and the prospects for ongoing sales growth with Blackwell make it the better long-term investment in the semiconductor sector.
Based on the text, here are two sentences that contain the words 'finance', 'investing', and 'money' and follow from the content:
Given the potential for Wolfspeed's SiC sales to reach $3 billion as the EV market expands, investing in Wolfspeed might be an exciting opportunity for those interested in the finance sector.
With Nvidia's record $35.1 billion in revenue in its third fiscal quarter and impressive earnings in the AI sector, it could be an attractive option for individuals interested in investing money in the finance market.