Investors with an interest in the semiconductor industry often find themselves weighing Texas Instruments (TXN 0.96%) against NXP Semiconductors (NXPI 1.63%). The two enormous chipmakers have a lot in common, competing head-to-head in several key markets and running very similar hybrid manufacturing models. So which one is the better investment right now?


Once upon a time, the main tiebreaker between these two stocks lay in their valuation. NXP traded at the bargain-bin ratio of 10 times forward earnings last spring, making it a no-brainer bargain of an investment. At the time, Texas Instruments shares were changing hands at 20 times forward earnings. For P/E purists, there was just no reason to consider TI over NXP.

Things have changed since then, but perhaps not to a game-changing degree. NXP investors pocketed a 74% return in 2019, while TI's shareholders had to settle for a (still market-beating) gain of 36%. Today, NXP's stock trades at 15 times forward earnings and 24 times free cash flows, while Texas Instrument's valuation ratios stand at 26 times forward earnings and 39 times free cash flows.

Operating trends

So NXP sure looks like the richer bargain right now, but that's never the whole story. Master investor Warren Buffett famously prefers buying great companies at a fair price over settling for fair companies at a great price, and that's a fantastic way to think about what matters to serious investors.

From that point of view, both companies have seen better days.

TI's top-line sales fell 12% year over year in October's third-quarter report. Adjusted earnings per share declined by 6%. The Chinese-American trade war limited the demand for TI's analog and embedded chips in important markets such as automotive computing and communications.

At the same time, NXP's revenues fell 7% and operating profits followed in lockstep. Once again, management pointed to weakness in the automotive computing sector, and the trigger event for that negative trend can be traced back to Chinese-American trade tensions.

On the other hand, NXP may have seen the worst of the trade war-related market softness. CEO Rick Clemmer said that the automotive revenue drops should slow down in the fourth quarter and probably turn around in 2020. And TI's top and bottom lines may be suffering, but the chip giant's free cash flows increased by 6.2% in the third quarter.

Two businessmen -- one young and one old -- armwrestling across a white table.

Image source: Getty Images.

So which stock should I buy?

At the end of the day, we're looking at two fantastic companies with plenty of long-term growth ahead of them, as soon as the tensions between Washington and Beijing go away. Anything can happen in an election year, and I would be surprised to see international trade issues weighing on the tech sector in 2021.

There aren't any losers in this matchup, but the two stocks do serve different types of investors.

Texas Instruments is the larger and slower option, committed to returning those massive cash flows directly to shareholders through buybacks and dividends. The dividend yield currently stands at 2.8%, which might not sound like a lot, but it really does make a difference in the long term. Over the last 10 years, TI delivered a 391% return measured in pure share-price gains. Reinvesting the dividends along the way into more TI stock would have boosted your returns to 523%.

NXP Semiconductors started paying a modest dividend last year, sporting a yield of 1.2% today. But this smaller and nimbler business can turn its attention to new growth markets with more conviction than TI's broad product portfolio ever could. That's how NXP became a market leader in not-yet-hot sectors like automotive computing and mobile security. Today, NXP investors can look back at an 807% return as these trends played out over the last decade, or 823% with dividends reinvested.

So TI is arguably the better choice for patient long-term investors with a yen for juicy dividends, while NXP appeals more to growth-stock enthusiasts. In this age of commission-free stock trades, there's nothing stopping you from buying some of each.