NVIDIA (NASDAQ:NVDA) and Texas Instruments (NASDAQ:TXN) usually attract different types of investors. NVIDIA, the market leader in gaming GPUs, usually attracts growth-oriented investors. Texas Instruments, which sells analog and embedded chips to a wide range of industries, attracts conservative investors with its big buybacks and stable dividends.

NVIDIA's stock rallied over 180% this year as it dazzled investors with the growth of its gaming and data center businesses. TI's stock only advanced about 10% as the macro-sensitive auto and industrial sectors throttled its growth throughout the U.S.-China trade war and the COVID-19 crisis.

But past performance never guarantees future gains, so we shouldn't assume NVIDIA will keep outperforming TI over the next few quarters. Instead, we should take a fresh look at both chipmakers and see which stock has more upside potential.

An illustration of a semiconductor.

Image source: Getty Images.

Why did the bulls rush to NVIDIA?

NVIDIA hit a rough patch last year when the cryptocurrency mining bubble burst. It initially sold a lot of GPUs to miners, but declining cryptocurrency prices caused them to dump their used graphics processing cards at low prices.

That glut reduced market prices and cannibalized sales of its newer cards. Competition from AMD's new cards exacerbated that pressure. However, NVIDIA's revenue growth turned positive again in the fourth quarter, and its gross margins expanded:

Period

Q2 2020

Q3 2020

Q4 2020

Q1 2021

Q2 2021

Revenue Growth (YOY)

(17%)

(5%)

41%

39%

50%

Gross Margin (Non-GAAP)

60.1%

63.6%

64.9%

65.8%

66%

YOY = Year-over-year. Source: NVIDIA.

It attributed that recovery to the resolution of its cryptocurrency-related inventory issues and robust demand for its new gaming and data center GPUs -- which offset cyclically weak demand for its automotive chips. The COVID-19 crisis strengthened NVIDIA's gaming and data center businesses (88% of its revenue last quarter) with robust sales of PCs for gaming and remote work, as well as higher usage of related cloud-based services.

NVIDIA also recently closed its acquisition of networking equipment maker Mellanox, which accounted for 14% of its second-quarter revenue, to further strengthen its data center division, which generated more revenue than its gaming unit for the first time in the second quarter.

NVIDIA expects its momentum to continue in the third quarter with 46% annual revenue growth and a non-GAAP gross margin of 65%-66%. Analysts expect its revenue and earnings to rise 35% and 41%, respectively, for the full year.

Why did the bulls avoid Texas Instruments?

Texas Instruments is more diversified than NVIDIA, but uneven sales to the macro-sensitive automotive, industrial, communications infrastructure, and personal electronics sectors have all dampened its growth over the past year.

But on the bright side, Texas Instruments' gross margins held steady because the production of its analog and embedded chips requires less capital than more advanced chips. TI's shift from 200mm to 300mm wafers in recent years also reduced its total production costs by up to 40%.

Period

Q2 2020

Q3 2020

Q4 2019

Q1 2020

Q2 2020

Revenue Growth (YOY)

(9%)

(11%)

(10%)

(7%)

(12%)

Gross Margin

64.3%

64.9%

62.6%

62.7%

64.3%

YOY = Year-over-year. Source: Texas Instruments.

TI's main end markets are more vulnerable to COVID-19 shutdowns than NVIDIA's, and its forecast for the third quarter -- which calls for a 6%-14% annual drop in revenue and a 10%-23% decline in earnings -- indicates the pain isn't over. Analysts expect TI's revenue and earnings to decline 7% and 1%, respectively, for the full year.

TI benefited from stronger sales of personal electronics throughout the pandemic last quarter, and the growing healthcare market offset the weakness of its other industrial markets. Unfortunately, those gains were erased by a steep sales decline in the automotive sector, where most plants remained closed.

A secular stock vs. a macroeconomic stock

NVIDIA isn't cheap at over 60 times forward earnings, but it benefits from the secular growth of the gaming and data center markets, which are well-insulated from COVID-19 and other macro headwinds.

Texas Instruments also isn't cheap at over 30 times forward earnings, but its diverse business is sensitive to macroeconomic trends. TI's forward yield of 2.5% crushes NVIDIA's paltry 0.1% yield, but TI's dividend isn't that appealing when other tech companies offer both higher yields and brighter near-term prospects.

I generally don't like to chase high-flying stocks, but NVIDIA will likely outperform Texas Instruments for the rest of the year. TI is still a stable long-term investment, but it won't attract the bulls until the COVID-19 crisis ends and the broader economy stabilizes.