Better Buy: NVIDIA vs. Texas Instruments

The semiconductor space is a hot topic these days, and for good reason. While chip sales have tended to generally fluctuate with the economy, we are entering an age dominated by high-powered silicon. As the coronavirus has accelerated trends such as working from home, telemedicine, cloud computing, the Internet of Things, and the race to 5G infrastructure, leading-edge chips are powering the most resilient parts of the economy today. 

Two particularly profitable chip stocks are Fool favorite NVIDIA (NVDA +0.56%) and blue-chip dividend champion Texas Instruments (TXN +1.67%). Both have had fine recoveries from the March swoon -- one of them, a really fine recovery. Yet at this point, which stock looks like the better buy today?

Image source: Getty Images.

One's got a better mix for these trying times

First, it's important to understand what NVIDIA and Texas Instruments both do. Texas Instruments specializes in analog chips -- or chips that convert elements from the "real" world into digital signals, or vice versa -- as well as microcontrollers, which are tiny computers that perform a single or minimal function in an appliance or other type of device while using very little power.

These types of chips are found in just about every type of electronic device there is, across a host of different industries. In particular, Texas Instruments has invested heavily in chips for automotive and industrial applications in recent years -- the theory being that over time, "connected" cars and automated factories will contain more and more semiconductors per unit.

Meanwhile, NVIDIA is more of a one-trick pony -- but oh, what a magnificent pony that is! A leader in graphics processing units, NVIDIA cut its teeth making chips for video games, which is still the company's largest segment, and is set to grow along with the attractive video gaming industry.

However, graphics processing units are also ideally suited for the parallel processing needs of high-performance computing and artificial intelligence applications, which are now in hypergrowth mode. NVIDIA's data center segment is starting to take off in a big way and has recently propelled the stock to new heights.

NVIDIA's eye-popping recent results

While many chip stocks have been neutral at best for 2020, NVIDIA's stock has really taken off and is up a remarkable 49.7% on the year. Even in the COVID-affected first quarter, NVIDIA posted some top-notch growth numbers.

Data source: NVIDIA Q1 2021 earnings release. YOY=year-over-year.

While 39% revenue growth and 100%-plus adjusted profit growth is great, it should be known that NVIDIA is lapping a big down year in 2019, when the U.S.-China trade war depressed demand for chips and semiconductors in general. In fact, NVIDIA's first-quarter gaming revenue is still below its first quarter revenue from two years ago. However, NVIDIA's data center segment is the real star here and is probably what has investors so excited:

Data source: NVIDIA quarterly revenue trend releases. 

Of course, the first quarter 2020 was marred by COVID-19, a significant headwind itself, so the recent quarter may have even been held back a bit. Still, the data center really boomed with the release of NVIDIA's new A100 GPU, based on its new Ampere architecture. According to the company, Ampere is the largest jump in performance in the past eight generations of NVIDIA's data center GPUs, giving clients a twentyfold performance boost over the prior generation.

Clearly, enthusiasm for the new A100 and NVIDIA's data center potential is the driving factor behind the stock's recent surge.  

NVIDIA's A100 GPU. Image source: NVIDIA.

Texas Instruments is a long-lasting blue chip

While Texas Instruments doesn't quite have the firepower of NVIDIA, investors are still getting a very diversified and profitable business that has lasted for 90 years. TI also has a sterling record of capital allocation that has allowed it to weather many types of economic conditions, all while delivering top-notch dividend growth to investors in the past two decades. However, the U.S.-China trade war, and now the COVID-19 slowdown, have affected Texas Instruments in a big way, halting its longer-term growth streak.

Data source: Texas Instruments annual report. 

While 2019 was a down year, the first quarter of 2020, which was affected by COVID-19, fell even below the 2019's first quarter as well, setting up the potential for two consecutive years of declines.   

Data source: Texas Instruments Q1 2020 press release. 

The difference between NVIDIA's blockbuster growth and Texas Instruments' declines can be attributed to their end markets. NVIDIA has a unique chips related to video games and the data center, two end markets that have seen an increase in demand amid COVID-19. Meanwhile, Texas Instruments serves the broader industrial economy, so its results have fallen with overall GDP declines this year, as well as a manufacturing recession last year resulting from the U.S.-China trade war.

But you'll have to pay up for NVIDIA's growth

While there's no doubt NVIDIA is the hotter stock right now, you'll have to pay up for the privilege of owning shares today, which are nearly three times as expensive as TI's valuation. That complicates the choice between the two:

Data source: YCharts.

Texas Instruments is far cheaper on a P/E basis and also has a nice 2.8% dividend yield, whereas NVIDIA doesn't pay much in the way of a dividend. What's more, Texas Instruments has raised its dividend every year for the past 16 years, even in the "down" year of 2019.

However, also notice that based on forward estimates, NVIDIA is set to grow next year, whereas Texas Instruments is forecast to see its earnings decline -- though analysts expect a bounce back in 2021. Clearly, the market is pricing in a lot of growth for NVIDIA, which is still more expensive based on earnings even two years out than Texas Instruments is today.

Young people should buy NVIDIA; dividend investors should buy TI

The choice between NVIDIA and Texas Instruments comes down to what kind of investor you are. NVIDIA clearly has exciting proprietary GPU technology and is in some of the most exciting end markets for the next 10 years. However, you'll have to pay a very high price for the stock today. If anything goes awry, NVIDIA's stock could see a big decline, since a lot of good news is priced in. On the other hand, Texas Instruments is a steadier, safe-haven stock that's likely to deliver a consistently rising dividend as the economy recovers; however, it has less exciting growth potential than NVIDIA when looking out over five or 10 years.

Therefore, younger growth investors may want to roll the dice on NVIDIA -- especially if the stock pulls back from these levels. On the other hand, older investors or retirees should gravitate more toward Texas Instruments for its longevity, diversified business, better valuation, and solid rising dividend.