Better Chip Stocks: Intel Vs. Texas Instruments
Intel (NASDAQ: INTC ) and Texas Instruments (NASDAQ: TXN ) represent two different ways to invest in the semiconductor market. Intel is the world's largest manufacturer of x86 CPUs for PCs and data centers. Texas Instruments, or TI as it is sometimes called, manufactures a wide range of analog and embedded chips for the automotive, personal electronics, communications and enterprise systems markets. Both companies are integrated device manufacturers (IDMs) that manufacture most of their own chips in their own foundries.
I compared these two blue chip semiconductor manufacturers in April 2022 and concluded that TI was the better buy than Intel. TI's stock price is down 9% since I made this call, while Intel's stock is down 27%. We'll see if this trend continues.
Over the past few years, Intel has fallen behind Taiwan Semiconductor Manufacturing (NYSE: TSM ), the world's most advanced contract chipmaker, in the "process race" to produce smaller, denser, more energy-efficient chips. When it lost that lead, rival Advanced Micro Devices – which outsources its manufacturing to TSMC – moved forward with more affordable CPUs.
Therefore, Intel's share of the x86 CPU market fell from 82.5% to 62.7% between the third quarters of 2016 and 2023, according to PassMark Software. A pandemic-induced surge in PC sales temporarily masked these problems, but they reappeared after those tailwinds dissipated. In response, Intel CEO Pat Gelsinger — who took the helm in early 2021 — doubled down on upgrading its first-party foundries in an effort to win process leadership from TSMC by 2025.
But as Intel has ramped up its spending, its revenue has fallen year over year for the past six consecutive quarters. Its client computing chip sales (mainly for PCs) have fallen for eight straight quarters, while its data center and AI ( DCAI ) chip sales have fallen for five straight quarters. Analysts expect its full-year sales to fall 17% and adjusted earnings per share to fall 66%.
This outlook is bleak, but a few green shoots are appearing. Its client PC and DCAI chip sales improved gradually last quarter, and Gelsinger expects the PC market to see a "sustained recovery in the second half of the year." It also expects the upcoming launch of its Intel 4 node — which is comparable to TSMC's 3nm to 5nm nodes — to be a driver of that growth. Its gross and operating margins also improved as it streamlined its spending. Analysts expect all these tailwinds to boost Intel's revenue and adjusted earnings per share by 12% and 184% in 2024, respectively -- which would mark the end of its long and painful cyclical slowdown. .
TI's spending plans unnerve bulls
TI doesn't have much exposure to the PC market, but macro headwinds over the past year have also caused the chipmaker's overall revenue to decline year-over-year for three consecutive quarters. Its analog chip sales declined in all three quarters, offsetting its relatively stable embedded chip sales.
TI's slowdown was due to macroeconomic issues in all of its end markets. But on a sequential basis, TI's Q2 2023 sales rose gradually, driven by quarter-on-quarter recovery in the automotive and personal electronics markets. But analysts still expect its revenue and EPS to fall 10% and 22% for the full year, respectively, as the market gradually declines.
TI isn't upgrading its plants as aggressively as Intel, but it's still pouring a lot of money into the ongoing transition from 200mm to 300mm wafers for its analog chips -- aimed at reducing the long-term costs of its bulk parts. roughly 40%. As a result, its gross, operating and free cash flow (FCF) margins have declined over the past year.
In fact, TI's FCF hit a negative $47 million in the second quarter, bringing its trailing 12-month FCF to $3.18 billion. That's less than half of the $6.5 billion TI has returned to investors through buybacks and dividends over the past 12 months.
That's a red flag for the shareholder-friendly strategies that make TI such an attractive investment for conservative investors. During a conference call last quarter, CFO Rafael Lizardi warned that its recent spending, which was aimed at supporting its revenue growth for "the next ten to 15 years," could continue to cause "short-term fluctuations" in its FCF growth. But looking further ahead, analysts expect TI's revenue and EPS to grow 7% in 2024 as it reins in its expenses and weathers its cyclical headwinds.
Which chip manufacturer is better to buy?
Intel is trading at 20 times next year's earnings, which seems like a reasonable valuation if it can successfully revive its massive business and catch up to TSMC. TI is trading at 21 times next year's earnings.
Intel cut its dividend earlier this year to free up more cash to expand its foundries, but it still pays a forward yield of 1.4%. TI pays a much higher forward yield of 3% and has increased its payout every year for nearly two decades.
Both of these chipmakers face near-term challenges. However, Intel's turnaround strategy is still much riskier than the incremental expansion of TI's 300mm plants. That difference, along with the higher dividend, makes TI a better buy than Intel.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Taiwan Semiconductor Manufacturing and Texas Instruments. The Motley Fool recommends Intel and recommends the following options: long January $57.50 calls on Intel and long January $45 calls on Intel. The Motley Fool has a
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