In the world of semiconductor stocks, investors have no shortage of good choices to put their money to work. But finding the best businesses in the industry is easier said than done. So to help get you started, let's look at a two very different -- but similarly sized -- semiconductor industry leaders, NVIDIA Corporation (NVDA +2.06%) and Texas Instruments (TXN +4.56%).
NVIDIA's Tegra X1 superchip, Image source: NVIDIA Corporation
The case for NVIDIA
First, while both stocks have handily outpaced the broader market so far in 2016, NVIDIA has climbed an incredible 252% year to date as of this writing, including a massive 29%-plus single-day pop last month, after the graphics chip specialist's fiscal third-quarter report absolutely trounced Wall Street's expectations. Revenue grew 54% year over year during the quarter, to $2 billion, significantly above estimates calling for just $1.69 billion. And earnings per share of $0.94 crushed the $0.69 analysts had anticipated.
And NVIDIA's strength wasn't limited to a single market vertical. Adoption for its flagship GPU technology was broad and strong. Gaming segment revenue jumped 63%, to $1.2 billion, data center segment revenue rose 193%, to $240 million, professional visualization revenue climbed 9%, to $207 million, and automotive revenue grew 61%, to $127 million. All told, these segments more than offset a modest 4% decline from NVIDIA's OEM and IP business, which itself was nothing new, considering its revenue is primarily the result of a cross-licensing agreement with Intel set to expire in fiscal 2017, while NVIDIA has fallen short in its efforts to strike similar new high-profile deals.
On top of that, NVIDIA has achieved this growth while returning more than $3.7 billion to shareholders since it restarted its capital return program in late fiscal 2013. And the company is not only on track to fulfill its promise of returning $1.0 billion to shareholders this fiscal year (2017) alone, but it also set a goal of returning $1.25 billion to shareholders through dividends and share repurchases in fiscal 2018.
The case for Texas Instruments
At the same time, Texas Instruments -- a veritable juggernaut in the analog and embedded processing chip markets -- hasn't left investors in want on the capital returns front. In fact, the company has committed to return all of its free cash flow to shareholders through dividends and stock repurchases, which means the company has returned whopping $3.8 billion to shareholders over the past year alone. And thanks to steady 7% compound annual growth in free cash flow from 2004 through last year, Texas Instruments has increased its dividend for 13 consecutive years -- including a 32% increase in its quarterly payout two months ago, to $0.50 per share, good for a roughly 2.7% annual yield -- while at the same time reducing its share count by 42% over that period.
But Texas Instruments also isn't enjoying the same torrid pace of growth as NVIDIA. Revenue last quarter grew 7%, to $3.675 billion, as solid demand in the automotive market and improvements in the industrial segment helped prop up roughly flat revenue in personal electronics. Net income for the quarter increased a respectable 21%, to $968 million, and earnings per share grew 24%, to $0.94. All told, Texas Instruments stock seems fairly priced trading at around 24 times trailing 12-month (TTM) earnings as of this writing.
The verdict
It's tempting to avoid NVIDIA stock, given its massive jump this year and trading at around 61 times TTM earnings. Given the gravity of its growth and relative business outperformance, however, it was no surprise to see NVIDIA stock predictably rewarded with significant multiple expansion.
And as its flagship GPU technology continues to play a central role in a growing number of high-tech industries, I'm certain NVIDIA stock will also continue to reward investors with outsize returns going forward. That's not to say Texas Instruments won't also beat the market. I think it will, albeit at a slower pace and from a larger base. But in the end, I think NVIDIA is a winner that will keep on winning.
