NXP Semiconductors (NASDAQ:NXPI) and Texas Instruments (NASDAQ:TXN) have a lot in common. They are two of the largest semiconductor businesses in the world, and both are setting the tone for the automotive computing market. How would an informed investor pick one of these stocks over the other?
That's actually a very simple decision.
One of these companies is not like the other
For all their similarities, NXP stands apart from Texas Instruments in one important respect. The company is in the process of being acquired by Qualcomm (NASDAQ:QCOM), creating an even larger semiconductor powerhouse. TI does not have any buyout offers on the table. So owning these two stocks will serve very different investing objectives.
Qualcomm is paying a cool $110 per NXP share, and it's an all-cash deal. Current NXP investors don't have to keep an eye on Qualcomm's share price, because their final payoff will be in the form of pure money. Qualcomm isn't printing any additional shares to cover the $47 billion bill, leaning instead on massive overseas cash reserves and some new debt papers.
Yes, the agreement might fall apart before closing. These things do happen. But the customer portfolios of Qualcomm and NXP don't have a ton of overlap between them, so the merger seems destined to sail right through the regulatory challenges along the way.
By the end of 2017, NXP investors are almost guaranteed to walk away with $110 per share. That's a low-risk path to a 12.6% return in twelve months or less.
So if you're looking for a relatively safe way to score a 52-week return in the double digits, NXP would be the ticket. If you still want to own the business afterwards, you could always reinvest your NXP buyout check in Qualcomm shares.
Staying in the market
That doesn't mean there's anything wrong with owning Texas Instruments. The chip-making veteran sports a flexible manufacturing model that uses both in-house production lines and third-party chip foundries as appropriate, allowing management to react quickly to shifting markets.
These days, that means leaning heavily on chips for industrial use and automotive computing. NXP is the undisputed leader in car-based chips with a 14% global market share, but TI holds a very respectable 7% share. Management has traced out a clear path to future growth, based on these two crucial sectors.
As NXP walks off the stock market to join forces with Qualcomm, TI remains a solid play on automotive and industrial computing in its own right. The stock is trading at 22 times forward earnings and 7.5 times book value, which is a rather rich valuation for a mature semiconductor business. But analysts expect TI's share prices to continue marching higher; this stock could very well beat NXP's 12.6% return over the next year.
The final score
Your decision will depend on how much risk you see in TI's one-year potential. If you believe that the stock should be worth at least $84 per share at the end of 2017, Texas Instruments should be your pick here. Otherwise, you might want to go with NXP's more predictable return.
Of course, TI also pays a generous dividend while NXP has put its payout plans on ice. Adding the value of reinvested dividends along the way, TI investors could settle for a less dramatic 9.9% return on the stock itself. Lowering the bar to an $82 price target per share could swing the decision in TI's favor.
There are no real losers here. TI and NXP are two quality businesses and very ownable stocks. They just appeal to different types of investors these days.