Yesterday, Nvidia (NASDAQ:NVDA) CEO Jensen Huang announced that the company would be open to considering using Intel (NASDAQ:INTC) as a foundry for manufacturing its chips. Nothing binding in terms of an agreement was announced, but the Nvidia share price rose 10% and the Intel share price gained 7%. Here’s why the news is significant for both companies.
Background
Nvidia is the leading designer of graphics processing units (GPUs). Its primary markets are gaming computers, data centres, and car entertainment systems. The company’s dominant position in markets that are growing rapidly has pushed revenues and profits higher. As a result, the Nvidia share price has gone the same way.
Intel, by contrast, has been having a difficult time lately. Despite having a bigger research and development budget, the business has struggled to innovate. As a result, it has fallen behind its rival Advanced Micro Devices in terms of design capacity. This has led to the company losing market share and the Intel share price has struggled accordingly.
The technological gap to AMD is reportedly huge. So in order to try and right the ship, Intel CEO Pat Gelsinger is attempting to pivot the company towards manufacturing. The shift is a risky one, involving substantial capital investment. But it’s the centrepiece of the Intel plan to stay relevant in the semiconductor boom.
Nvidia and Intel
The idea that Nvidia might be open to using Intel’s manufacturing facilities (known as foundries) is significant for both companies. For Nvidia, having Intel produce its chips would allow it to diversify its manufacturing base. Adding Intel to its foundry list would decrease its reliance on Taiwan Semiconductor Manufacturing and would also give it the capacity to manufacture chips in the US.
For Intel, the news that Nvidia might be willing to use their facilities goes some way towards justifying the company’s move to investing huge amounts in manufacturing facilities. Intel is involved in designing chips as well as manufacturing. An immediate concern is whether rival chip designers would be willing to use Intel’s facilities for fear of giving away their trade secrets. Yesterday’s announcement goes some way towards assuaging these concerns.
Conclusion
For me, investing in either stock involves too much risk. I think that the Nvidia share price is very high at the moment. While I view the company as impressive, I’m not convinced that it can grow its earnings fast enough to justify an investment at these levels. With Intel, the opposite is true. The Intel share price seems low. But the issue there is that I’m not sure that the company can grow its earnings at all. Intel has a lot of capital expenditure ahead of it and the question of whether or not it will pay off seems uncertain to me. As a result, I’d prefer to take a much lower-risk strategy in buying into semiconductor stocks.
The post The Nvidia share price and the Intel share price both jumped! Should I buy either? appeared first on The Motley Fool UK.
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Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
