Semiconductor stocks have been good places for investors to be over the last five years. But concerns about a coming industry slowdown have rocked chip stocks lately. Shares of Cypress Semiconductor (NASDAQ:CY) and Texas Instruments (NASDAQ:TXN) are down 15% and 24%, respectively, over the last three months. During their third-quarter conference calls to discuss recent operating results, both Cypress and TI management cited weak demand in their respective markets heading into the fourth quarter. 

But one thing was clear: Both companies still see favorable trends boosting their growth over the long term, which could make the current sell-off a particularly good time to consider picking up shares. We'll compare both companies' recent performance and valuation to see which stock is the better buy.

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Image source: Getty Images.

What do these companies do?

Cypress supplies embedded chips for a growing range of connected things across the automotive, industrial, medical, consumer electronics, and smart-home sectors. The company was founded in 1982 and made its name by becoming a lead supplier of programmable systems on a chip (PSoC) components and SRAM memory products. But in recent years, Cypress has positioned itself to focus more on high-growth markets like infotainment systems in cars and smart-home products, and less on slower-growing, legacy businesses like some of its memory products for routers and other telecommunications equipment. 

On the other side, TI makes analog and embedded processors that are found in mobile devices and other consumer electronics; and, yes, your high school calculator. But 54% of its revenue in 2017 was generated from automotive and industrial applications, and that percentage is likely to move higher over time, consistent with management's strategy to focus more investment on faster-growing markets. 

Which company is growing faster?

Over the last five years, Cypress has changed CEOs once. And it has gone through a significant transition through acquisitions and implementation of its Cypress 3.0 strategy to position itself for growth in connected cars and the Internet of Things (IoT). Since 2013, revenue has grown 243%, and while earnings per share have bounced around mostly due to accounting rules, free cash flow per share has exploded 517%. 

Cypress just reported an overall solid third quarter, with revenue up 11% year over year with non-GAAP EPS increasing 48% versus the year-ago quarter. Analysts expect adjusted earnings to grow 49% in 2018 compared with last year, while revenue is expected to grow 6.5%. Over the next five years, analysts expect earnings to grow at a compound annual rate of 13.5%. 

Metric Cypress Semiconductor Texas Instruments
Market capitalization $4.82 billion $91.22 billion
Revenue (TTM) $2.48 billion $15.82 billion
Net income (TTM)  $53.47 million $4.69 billion
Free cash flow (TTM) $462.83 million $5.93 billion

Data source: Y Charts. TTM = Trailing 12 months.

As for TI, revenue hasn't grown quite as fast as Cypress, up only 30% over the last five years. Like Cypress, TI is transitioning to where the growth is, such as automotive and industrial applications. But given TI's mammoth size, versus the smaller Cypress, this is like steering a cruise ship compared with a speedboat.

Industrial and automotive markets have increased from 42% of revenue in 2013 to 54% last year. Meanwhile, other segments, such as personal electronics and communications equipment, have gradually declined in importance to the company's top line.

However, management's discipline in controlling costs and allocating capital to areas that deliver better margins has translated to strong growth on the bottom line. Earnings and free cash flow per share have surged 144% and 122%, respectively, over the last five years. 

In the third quarter, TI grew revenue 4% year over year, while earnings and free cash flow increased 25% and 40%, respectively. Analysts expect TI to grow earnings 13% annually over the next five years. 

Near-term outlook

Texas Instruments shook the semiconductor industry when management reported that demand for its products "slowed across most markets" in the most recent quarter. Although TI is heading into a softer market in the short term, management plans to continue maintaining current investment levels to drive long-term growth. 

Cypress also sees a softer market heading into the fourth quarter. CEO Hassane El-Khoury said it sees "some signals of changes to the demand environment as tariffs and macro concerns are causing disruptions" for some customers across key markets. Nonetheless, management fully expects to meet its full-year target of 7% revenue growth. 

No matter what happens in the short term, the longer-term trends of increasing chip content per vehicle and the explosive growth expected from the adoption of connected devices will remain. Both Cypress and TI are well positioned to benefit from the IoT market, which is expected to grow 8% per year to reach $232 billion by 2023. 

Which is the better buy?

Cypress is definitely the faster-growing of the two. The company is scoring wins with major tech giants that are benefiting from the growth of home automation and other connected devices. Cypress is known to supply chips for Amazon.com's Echo device and Alphabet's Google smart-home products, among many others. 

TI has a who's who list of customers, as well. The famous calculator brand has supplied chips for Google Home devices and Apple's new iPhone XS.   

But I have to side with Cypress. It's not only growing faster, but it also sports a lower forward P/E of just 11 times expected earnings, as compared with TI's more expensive forward P/E of 17. Both stocks also pay a generous dividend yield, with Cypress currently offering a yield of 3.22%, while TI currently pays a 3.31% yield.

All in all, Cypress is the better buy in my book.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Ballard has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, and Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Cypress Semiconductor. The Motley Fool has a disclosure policy.