It's been a rough couple of months in the broader market, especially for technology stocks. Seagate Technology (STX) was up about 40% for the year through the end of June, but the recent market sell-off has taken away almost all those gains. As a result, Seagate's stock is up only 2.8% year to date. It's a similar story for Texas Instruments (TXN 2.22%), with the chip maker's shares now down 8% year to date after being in positive territory for much of 2018.

But for long-term investors, a market sell-off is often a signal that it's time to go shopping. Both Seagate and Texas Instruments have been enjoying nice tailwinds in their respective markets. We'll compare the investment case of the two companies to find out which one offers the best risk-adjusted returns from here.

A silver figurine of a bear and a bull standing on a stock chart.


The never-ending need for more storage capacity

Seagate is coming off a strong finish to fiscal 2018 (its fiscal year ended in June) in which fourth-quarter revenue jumped 18% year over year. The hard disk drive maker has seen strong demand from the enterprise market, and this has had the secondary effect of lifting per-unit selling prices and gross margin. 

The momentum continued into the first quarter of fiscal 2019. Seagate reported revenue growth of 14% year over year and a 77% improvement in non-GAAP earnings per share. Management credited the strong quarter to 41% growth in total storage capacity shipped. This is being driven by "persistent global data growth trends and demand for Seagate's mass storage solutions," as CEO William Mosley explained. 

The story gets better. Mosley mentioned several major trends impacting the company's current growth, including big data analytics, artificial intelligence, smart cities, machine learning, gaming, video creation, and entertainment. "Developing our product portfolio to intercept these trends has resulted in strong exabyte growth over the past several years, and we expect these trends to continue," Mosley said. 

But it wasn't all roses for Seagate. Mosley warned of near-term slowing demand from customers in China as large customers work through existing inventory before buying more storage. Mosley is confident that once buying resumes, growth will be even faster. This is because the world is accumulating data faster than the rate of growth of storage capacity. 

One of the main risks for Seagate is that the storage industry can be very cyclical. Periods of strong growth and price increases can turn on a dime due to supply chain disruptions and competition. Seagate is also dependent on the hard disk drive market, which is gradually becoming obsolete as solid-state drive technology becomes more widely adopted. 

Everything needs a processor these days

Texas Instruments offers much more than calculators. The chip maker has seen strong demand in recent years from various industries: It supplies analog and embedded processors for many applications, including factory automation, mobile devices, home appliances, data centers, and infotainment systems in cars. TI's fastest growing markets are automotive and industrial, which comprised 54% of revenue in 2017, and that percentage has been steadily increasing every year. 

After years of single-digit revenue growth, the company saw its top-line growth accelerate to 12% in 2017. However, growth in the third quarter of this year dramatically decelerated to just 4% year over year. CEO Rich Templeton said "demand for our products slowed across most markets" during the quarter. Other companies in the semiconductor industry reported some weakness in the recent quarter, which could point to a near-term slowdown in the chip industry. 

As a result, management issued fourth quarter revenue guidance lower than Wall Street analysts' expectations. The consensus analyst estimate now anticipates that TI's revenue will decline 1.8% in 2019. But analysts expect the company to boost earnings 13% per year over the next five years. 

One thing TI does well is control costs, which allows earnings per share to expand faster than revenue. This was on full display last quarter, with earnings per share soaring 25% year over year. Management said they will enter this soft demand environment with more focus on operational discipline. 

Additionally, TI plans to maintain current spending levels while driving long-term growth. Management said the slowdown will have no impact on their plans to continue transitioning to 300-millimeter wafer production, which is part of the company's strategy to expand gross margin going forward. 

Which is the better buy?

Seagate is much cheaper according to a cross-section of popular valuation metrics, as you can see in the middle section of the table below. It even sports an above-average dividend yield for income seekers:

Metric Seagate Technology Texas Instruments
Market cap $12.71 billion $91.28 billion
Revenue (TTM) $11.54 billion $15.82 billion
Trailing PE 10.97 21.86
Forward PE 7.85 17.2
PEG ratio 0.76 1.33
Dividend yield 5.69% 3.16%

Data source: The companies and Yahoo Finance. TTM = Trailing 12 month. PE = price to earnings. PEG = price to earnings growth. 

This decision really boils down to how much stomach you have for risk and volatility. Seagate's forward P/E of 7.7 times expected earnings and its 5.7% dividend yield are very appealing, especially if you believe that increasing data creation will drive the need for more storage. For those willing to ride the potential ups and downs of the industry, Seagate could prove a timely choice right now.

As for me, I need more time to weigh how long demand for hard disk drives will last given the growing adoption of solid-state drives, which are more expensive but feature higher power efficiency and much faster data retrieval speeds than hard disk drives. The problem is that Seagate derives less than 10% of its revenue from solid state drives. If demand for this technology were to suddenly accelerate, the company would suffer dearly.

This is why I would favor Texas Instruments. The chip maker's stock is more expensive, but it offers investors a better risk-to-reward ratio compared to Seagate. TI provides chips for just about every sector of the economy, which means it's not dependent on any one industry for growth. Therefore, I believe TI is the better buy.