Texas Instruments (NASDAQ:TXN) and NXP Semiconductors (NASDAQ:NXPI) are two of the largest semiconductor companies in the world. TI can look back at $15.6 billion in trailing revenues, and NXP is close behind at $9.2 billion.
The two companies have a lot in common. In an era when many chip designers farm out all their manufacturing operations to third-party foundries, both NXP and Texas Instruments run a hybrid manufacturing model that combines outsourcing with in-house manufacturing facilities. They also face off in the market as competitors in key markets such as automotive and industrial computing.
So which one of these semiconductor giants makes the better investment right now? Let's find out.
The case for Texas Instruments
TI is the larger and more mature company in this matchup. Founded in 1930, TI is moving closer to a centennial anniversary. The company has been a driving force of innovation since the dawn of the semiconductor, having made crucial inventions such as integrated circuits, commercial silicon transistors, and handheld calculators.
You might know TI as the leading maker of calculators today, but that's actually just one component of a small segment labeled "other," which amounted to 9% of last year's total revenues. Industrial chips account for a much larger piece of the pie at 36% in 2018, followed by personal electronics at 23% and automotive computing near 20%. TI's management sees automotive and industrial computing as the company's core markets these days, and aims to make them even more important to the company's revenue generation in future reporting periods.
A massive product catalog and that flexible manufacturing model combine to make TI nearly immune to short-term market swings. It's also an efficient cash machine that generated $6.1 billion of free cash flows out of $15.6 billion in top-line revenues last year -- and returned all that extra cash to shareholders in the form of dividends and share buybacks. TI reduced its share count by 5% over the last four quarters and offers a generous 2.6% dividend yield. Look up "blue-chip stock" in the dictionary and you'll find that iconic Texas-shaped logo as the definition.
The case for NXP
This Dutch company also boasts a long history, having started as the semiconductor division of electronics giant Philips (NYSE:PHG) in the 1950s. You might know NXP best for its world-leading market share in the automotive computing industry, or for its leading role in developing and commercializing near field communications (NFC), the chips the let you pay for gas and groceries with your phone instead of a credit card.
Automotive products accounted for roughly half of NXP's first-quarter revenues, ahead of 21% for communications infrastructure chips and 18% coming from customers in the industrial and Internet of Things sectors. For the future, NXP is focusing on key growth opportunities such as 5G wireless radio chips, secure mobile transaction tools, and ultra-low-power industrial processors.
NXP looks like a leaner, meaner version of Texas Instruments, with a tighter focus on promising high-growth markets. The company might be a little more vulnerable to market swings than its Texan peer, but the higher market risk comes with the possibility of bigger potential rewards.
And the winner is...
In the red corner, Texas Instruments presents a rock-solid business with massive revenues and generous dividends. In the yellow-blue- and-green corner, NXP runs a more focused business that attempts to exploit some of the most exciting growth markets on the table today.
TI could be the stock for you if you're looking for stability and bountiful dividend checks, with an outside chance of the company igniting a serious growth spurt if its industrial computing bets pay off.
NXP is the more exciting pick for growth investors, and Mr. Market left the Dutch company in the lurch when the Qualcomm (NASDAQ:QCOM) merger fell apart last year. The stock is trading at just 15 times trailing earnings and 10 times free cash flows, versus 22 times earnings and 33 times cash flows for TI. In short, NXP's stock is poised for a big comeback when market makers finally forgive the company for its failed merger attempt.
So I can see a place for TI shares in your portfolio under certain circumstances, but NXP is simply a better investment at today's deeply discounted prices.