Nvidia Corp. NVDA, 2.38% surpassed Intel Corp. INTC, -1.38% as the largest U.S. chip maker by market cap for the first time on Wednesday. Nvidia shares closed up 3.5% at $408.64, giving it a market cap of $251.31 billion, while Intel shares finished up 0.5% at $58.61, giving it a market cap of $248.16 billion, according to FactSet data. For the year, Nvidia shares have gained 74% while Intel shares have slipped 2%, compared with a 11% gain in the PHLX Semiconductor Index SOX, 3.14%, a 17% gain in the tech-heavy Nasdaq Composite Index COMP, 1.64%, and a 1.9% decline in the S&P 500 index SPX, 0.66%. While it is not the first time a U.S. chip maker has surpassed Intel in market cap, it is the first time for Nvidia. Back in 1999 and 2000, Texas Instruments Inc. TXN, 1.89% surpassed Intel in cap a few times, and between late 2012 and mid-2014 Qualcomm Inc. QCOM, 3.80% and Intel often jockeyed for the No. 1 position, according to Dow Jones data.
Nvidia is a fabless semiconductor company that designs graphics processor units (GPUs), the chips that drive computer screens, especially those for gaming systems and consoles. They were also popular for Bitcoin and other crypto-currency mining rigs, though that market seems to have played itself out. They earned just over $3 billion in profit in their fiscal Q1.
Intel, of course, makes CPUs, the central processing units at the heart of pretty much every computer. They’ve had trouble recently as rival AMD has lapped them in a number of markets, Apple is abandoning them as the Mac CPU manufacturer to go with a custom ARM-based system-on-a-chip, and reportedly Intel has had process yield problems with their chips. However all of that hasn’t prevented them from announcing over $5 billion in profits for their last fiscal quarter, though they also announced they’re pushing out their 7mm process node.
Nvidia, like AMD, has its chips fabbed by TSMC. (AMD is also a competitor to Nvidia in the GPU space, having bought GPU maker ATI back in 2006.) Intel has more than a dozen of it’s own own wafer fabrication plants. But there are reports that even Intel has contracted with TSMC to fab some of its chips next year.
As of this writing, Nvidia is trading at a share price of about 78 times earnings. Meanwhile, Intel is trading at about nine times earnings. That’s a crazy divergence.
Owning your own fabs has become a very expensive proposition, but once they’re up and running, the costs are lower and give you full control of the process. So far Nvidia has benefited greatly from having TSMC fab their chips, but it’s rumored that all of TSMC’s cutting edge 5nm fab wafer starts are already spoken for next year (Apple is another customer), and it will take time for more fab capacity to come online. That may start to constrain Nvidia’s growth.
Nvidia is certainly having a better year than Intel, but 80 times earnings is a pretty crazy P/E ratio. Some market correction is probably in order.