Better buy: Apple vs. Nvidia

Apple (AAPL -0.15%) and Nvidia (NVDA -0.87%) both were favorite tech stocks that lost their luster over the past year. Apple’s stock hit an all-time high of $180.96 in January, but later retreated to $130. Nvidia’s stock closed last year at a record high of $333.41, but is now trading at $160.

Both stocks weakened as inflation, rising interest rates and other macroeconomic headwinds pushed investors toward more conservative investments. Both companies have also struggled with their own specific problems: Apple has faced slower iPhone sales and supply chain disruptions, while Nvidia has struggled with a post-pandemic PC market slowdown.

Could any of these out-of-favor tech stocks bounce back in 2023 and beyond? Let’s consider their tailwind, headwind and valuations to decide.

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Image source: Getty Images.

What happened to Apple?

Apple’s revenue and earnings per share (EPS) rose 33% and 71%, respectively, in fiscal 2021 (which ended in September 2021), after it finally entered the 5G market with its iPhone 12 smartphone family .Its revenue and EPS rose another 8% and 9%, respectively, in fiscal 2022 even after it passed that launch and faced new supply chain hurdles.

For the full year, Apple’s iPhone sales rose 7% and Mac sales rose 14% (even as the Windows PC market fell), while sales of its wearables, home devices and additional equipment grew 7% as it sold more Apple Watches, AirPods, and other peripherals. Services revenue also grew 14% as it locked in more than 900 million paid subscribers across its ecosystem. All of these growth drivers offset the 8% decline in iPad sales.

But fiscal 2023 will be much messier. Apple’s main contract manufacturer, Foxconn, faced disruption in November as workers at its largest iPhone factory protested over COVID-19 restrictions and unpaid bonuses. Apple has already lowered its annual production target for the iPhone 14 Pro and Pro Max from 90 million to 87 million units to account for those challenges, but future protests could cause even more unpredictable problems for Apple.

Still, Apple still ended fiscal 2022 with $169 billion in cash and marketable securities, and it bought back a whopping $550 million in stock over the past decade. That strong liquidity should make Apple an attractive investment as long as rising rates continue to choke unprofitable companies with weak cash flows. Apple is also expected to launch a new “mixed reality” headset next year – and that product could generate a new revenue stream from the hardware.

Based on those expectations, analysts believe that Apple’s revenue and earnings will grow by 3% and 2%, respectively, this year. Those growth rates are steady, but at 22 times earnings, Apple’s stock isn’t cheap just yet.

What happened to Nvidia?

Nvidia controlled 88% of the discrete GPU market in the third quarter of 2022, according to JPR. The remaining 12% was split between them Advanced Micro Devices and Intel.

Its revenue and adjusted EPS rose 53% and 73%, respectively, in fiscal 2021 (which ended in January 2021). In fiscal 2022, its revenue grew another 61% as adjusted EPS rose 78%.

Most of that growth was driven by three headwinds:

  1. Strong PC sales during the pandemic as more people worked remotely, took online classes and played more PC games.
  2. Growing interest in cryptocurrency mining using gaming GPUs.
  3. Using more powerful GPUs in data centers to process complex machine learning and artificial intelligence tasks.

But in fiscal 2023, analysts expect its revenues to remain flat and EPS to fall 27%. That slowdown was caused by a post-pandemic slowdown in the PC market, sluggish sales in China amid COVID-19 lockdowns and tighter gaming restrictions, and a slump in the crypto market — all of which offset its robust sales of data center GPUs. The Biden administration’s ban on advanced chip sales to China, which affects its high-end data center chips, will exacerbate that slowdown.

For fiscal 2024, analysts expect Nvidia’s revenue and earnings to grow 9% and 32%, respectively, as those markets gradually stabilize. But at 38 times earnings, Nvidia’s stock still looks a little overpriced relative to its near-term upside.

But just like Apple, Nvidia still has plenty of cash. It ended its most recent quarter with $2.8 billion in cash and cash equivalents and bought back $8.8 billion in stock during the first three quarters of fiscal 2023. That high liquidity gives it plenty of room to develop new chips, expand into new markets and make acquisitions. smaller companies — even though antitrust regulators killed a proposed $40 billion takeover SoftBank‘s Arm Holdings earlier this year.

The obvious winner: Apple

Apple faces a short-term slowdown, but its business is much better diversified and less cyclical than Nvidia’s. It also has a lot more money, its inventory is cheaper, and it probably has more options to expand its portfolio of products and services than Nvidia. Therefore, I strongly believe that Apple is a better buy than Nvidia in this challenging tech stock market.

Leo Sun has positions in Apple. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Intel, Nvidia and SoftBank Group. The Motley Fool recommends the following options: long January $57.50 calls on Intel, long January $45 calls on Intel, long March $120 calls on Apple, short January 2025 $45 calls on Intel and short calls on March 2023 from $130 for Apple. The Colorful Fool has a privacy policy.

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