Infineon is worth more than 1 twelfth of Nvidia ()

Infineon (WKN: 623100) and Nvidia (WKN: 918422) are both among the largest semiconductor companies in the world. But do they also play in the same league? The graphics chip giant’s market capitalization is 12 times that of Infineon, the leader in automotive chips. So let’s find out if things are going right there.

The semiconductor industry is at a crossroads

Nvidia had a great rally in 2020 and 2021. And Infineon was also quadrupled since the corona make. First, there was a boom in demand that surprised many, and then the chip shortage provided large margins. Nvidia benefited not only from the classic core business around graphics cards, but also from the cloud business and the crypto hype.

Since the peak in November 2021, both have now roughly halved. The entire sector has suffered for months from the uncertain outlook. Would surging demand soon give way to a lull due to the recession?

Some analysts think it will. The once wild price targets have been drastically reduced. For example, Barclays analysts believe that the minor rally in July will be short-lived. The companies will radically cut their earnings estimates by the end of 2023. It is a similar story at Deutsche Bank. The downside risks therefore dominate.

On the other hand, it can be stated that the world’s largest chip manufacturer TSMC (NASDAQ:909800) continues to deliver solid numbers. The first half of the year went well. While some sales markets are stagnating, other underlying trends are still intact.

The Internet of Things drives business as much as cars equipped with increasingly digital technology or the growing need for computing power for data centers and edge computing. TSMC sees no reason to lower its positive outlook. The situation is the same for the leading outfitter ASML (WKN: A1J4U4). He still has a mountain of orders to work through.

Apparently, many market participants are still optimistic about the future potential. However, it is also clear that this situation can lead to overcapacity if an expanded supply meets a stagnant demand.

Who is better off now – Nvidia or Infineon?

Nvidia has delivered very decent numbers over the past few quarters. There can be no question of a contraction, which could be assumed from the price development. For the current fiscal year, analysts expect sales to grow 24% to over $33 billion, with operating profit of about $12 billion.

Rates of 20% and more are expected to continue in the coming years. The numerous vehicle autonomy deals with the German car industry and the latest partnership with Siemens (WKN: 723610) around the industrial metaverse also plays a role. Nvidia can fully exploit its strong market position in such rapidly developing application areas as it did before with cryptomining.

Infineon, on the other hand, targets less hip but similarly strong trends. The potential share of added value is constantly increasing due to the increasing electrification of vehicles. When it comes to power semiconductors, Infineon is at the top. And the specialty memory modules that came under the group’s umbrella via the Cypress acquisition could still make it big.

In the latest quarterly report, which the management presented on 3 August, the management emphasized the strong demand from the automotive sector. The current fourth trimester of the current financial year is obviously already off to a good start. The sales expectation can thus even be raised to 14 billion euros, where the strong US dollar also plays a role.

Quarterly sales increased by 33% year-on-year, and the operating segments’ profit by a whopping 70% to an impressive 842 million. EUR. At Nvidia, it was around 3 billion euros in the most recent record quarter. But that’s less than four times that amount, a far cry from the 12 times the share prices suggest.

My conclusion: Investors are better off with Infineon

Nvidia is on a good run. And if the growth rates can actually be sustained, then the exorbitant valuation multiples will eventually come down to a manageable level. But the risks along this path are significant. Even a mild recession could ensure that margins return to normal.

As such, I wonder if profits will really grow as dynamically as many expect. With a price-to-sales ratio of around 15 and a price-to-book ratio of over 20, there is considerable downside potential.

It looks much friendlier with Infineon, which is rated 12 times cheaper. The Munich-based company can also point to huge growth opportunities without relying on risky crypto transactions.

In addition, the strong dollar currently makes investments in US stocks more expensive. So the case is clear to me: Nvidia is not worth 12 Infineons. Or put another way: Infineon is worth far more than a twelfth of Nvidia.

The article Infineon is worth more than 1 twelfth of Nvidia appeared first on The Motley Fool Germany.

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Ralf Anders owns none of the shares mentioned. The Motley Fool owns shares of and recommends ASML Holding, Nvidia and Taiwan Semiconductor Manufacturing.

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