Although accurate, RBC technology analyst Doug Freedman has been rather volatile in his analysis of chip stocks. Now, Freedman is bullish on the industry, having said it's becoming mature and that generous capital allocation programs should soon become the norm. Nonetheless, like all industries, some companies are better than others, and in this particular space, NVIDIA (NASDAQ:NVDA), Micron (NASDAQ:MU), and Texas Instruments (NASDAQ:TXN) all look stellar.
Strong growth in a place with attractive return policies
NVIDIA is a $10 billion company that, after years of flat trading, has finally broken into a new range. This company has historically relied heavily on PCs, developing visual computing technology.
The bulk of the company's revenue, nearly 75%, comes from its PC GPU platform, which is growing at a high single-digit rate, albeit in a declining industry. Plus, its mobile and cloud units, both relatively small, have grown at an annual rate of 48% and 64%, respectively, during the last four years. Looking ahead, NVIDIA is expected to grow revenue 9.8% this year and 4.3% in 2015.
Therefore, strong growth levels are still intact, but as Freedman stated, NVIDIA is becoming more shareholder-friendly. Last year, it bought back nearly $800 million worth of shares, and still has roughly $1 billion left on the current program. In addition, it pays a dividend yield of 1.9%, making its forward P/E ratio of 18 attractive.
Memory technology company focusing on growth
Micron has rallied with stock gains of 135% in the last year, after having successfully integrated the acquisition of bankrupt DRAM manufacturer Elpida, and following strong product pricing and demand. Micron is a memory technology company that manufactures NAND, which is used in smartphones and tablets, and DRAM devices, found in PCs.
While the acquisition of Elpida increased Micron's capacity by 45%, and is a large reason for Micron's 76% expected revenue growth in 2014, the company continues to see strong organic growth led by a 30%-plus growth rate in NAND. However, Micron's $2 billion acquisition of Elpida, combined with the integration of its business, has taken from the company's ability to be shareholder-friendly with dividends and buybacks.
With the company's growth expected to become steady at a 5% clip following 2014, and at just 8.7 times forward earnings, Micron is cheap, with high margins, and will likely return large sums of capital in the near future. Regardless, Micron is a growth story today, but a value play for the future, and a good one at that.
The quintessential give-back chip company
Lastly, Texas Instruments creates more than 80% of its annual revenue from analog and embedded processing, which puts the company front-and-center in many of the most used technologies and devices today. Essentially, Texas Instruments is the company that Freedman believes other chip companies will eventually become, somewhat secular with a strong focus on giving back to shareholders.
This company returned $4.2 billion to shareholders last year in the form of buybacks and a 2.7% dividend yield. Essentially, Texas Instruments gives back all free cash flow, excluding what's needed for debt repayments.
Moreover, the company has almost fully penetrated its core market, and its 6% growth rate is a reflection of its industry. Thus, at 17 times forward earnings, and with shareholder-friendly policies in place, Texas Instruments is a good, safe investment for the long term.
NVIDIA, Micron, and Texas Instruments give shareholders exposure to various corporate strategies in the immediate future. Yet, looking past this year and toward 2015, each company is expected to grow at a rate between 4%-6%.
Therefore, Micron looks best-priced for gains, given its valuation, but Texas Instrument has the best capital return program in place, along with the highest growth expectation for 2015. As a result, Texas Instruments, Micron, and NVIDIA present three good options for the future, all of which are likely to continue giving back more to shareholders in upcoming years.
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Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Nvidia. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.