NVIDIA (NASDAQ:NVDA) and Texas Instruments (NASDAQ:TXN) make different types of semiconductors -- silicon wafers (or chips) bearing integrated circuits that help power all electronic devices, from the cheapest calculator to the most expensive data center server.

Over the last 10 years, both companies have significantly outperformed the market, though NVIDIA's share price is up 2,230% during that time, while shares of Texas Instruments have gained 392%. But that's in the past. Which of these stocks is the better buy today?

How does NVIDIA operate?

NVIDIA's graphics processing units (GPUs) have been in high demand in recent years, both for their capacity to create stunning video game graphics and their ability to accelerate data center computing.

The front of the NVIDIA endeavor building.

Image source: NVIDIA.

In the gaming space, NVIDIA pioneered the GPU, ray-tracing, and deep learning super sampling (DLSS) technologies that create ultra-realistic video game graphics at accelerated frame rates. In other words, NVIDIA's graphics cards provide a world-class gaming experience. Last September, the company launched its latest GeForce RTX 30 series graphic cards to overwhelming consumer demand.

In the data center space, NVIDIA GPUs are faster and more efficient than CPUs, and they have consistently outperformed products from rival chipmakers like AMD and Intel. This makes NVIDIA's chips better suited to intense workloads like big data analytics and artificial intelligence. As a result, eight of the world's 10-fastest supercomputers are powered by NVIDIA's technology. Simply put, when it comes to high-performance computing (HPC) applications, NVIDIA's GPUs are the best-in-class solution.

NVIDIA further strengthened its position in the data center market with the acquisition of Mellanox in early 2020. The company's high-performance networking solutions (smart adapters, switches) make NVIDIA's computing platform even faster and more secure. Moreover, by offering these solutions in-house, NVIDIA should realize significant operational efficiencies over time.

In short, the chipmaker's strong competitive position has been a major benefit, powering strong sales and free cash flow growth in recent years.

Metric

2018

Q3 2021 (TTM)

Change

Revenue

$9.7 billion

$14.8 billion

52%

Free cash flow

$2.9 billion

$4.2 billion

45%

Data source: NVIDIA SEC filings. TTM = trailing 12 months. Note: Q3 fiscal 2021 ended Oct. 25, 2020.

In 2020, NVIDIA also announced its intention to acquire ARM holdings from SoftBank for $40 billion, a chipmaker that licenses its CPU architecture to companies like Apple, Qualcomm, and Samsung. This acquisition would dramatically expand NVIDIA's presence in mobile and Internet-of-Things (IoT) devices, industries in which ARM has over 90% market share. It would also extend NVIDIA's ecosystem of partners and developers, which could allow the chipmaker to mimic ARM's highly profitable business model and license its own GPU technology. Either way, management believes this deal would more than double NVIDIA's addressable market to $250 billion by 2023.

However, the acquisition hasn't been approved yet. And somewhat ironically, several big tech companies have voiced concern about the deal. Investors should pay attention to this situation.

How does Texas Instruments operate? 

Like NVIDIA, Texas Instruments is a semiconductor manufacturer. However, instead of GPUs, the company primarily designs analog chips and embedded processors.

An embedded processor made by Texas Instruments.

Image source: Texas Instruments.

Semiconductors can be broadly classified into three groups: analog, digital, and mixed-signal chips. Analog chips are present in all electronic devices, and are responsible for amplifying or converting real-world signals like pressure, sound, and temperature into electronic signals -- the type of signals that can be processed by digital chips.

For example, embedded processors are digital chips designed to handle a specific task. Calculators use embedded processors to power mathematical functions like addition, subtraction, multiplication, etc. So if you associate Texas Instruments with graphing calculators, that's not a coincidence. But embedded processors actually have a wide array of use cases, especially in the automotive and industrial markets.

Together, analog chips and embedded processing represented 93% of Texas Instruments' total revenue in fiscal 2020. What's more, the company holds a market-leading position in both industries, with a 19% market share in analog and a 14% market share in embedded processing. But there's a downside: Neither of these markets is growing very quickly, and Texas Instruments' dominant market share doesn't leave much room to expand.

In fact, Texas Instruments' revenue has actually declined in recent years. And while free cash flow has grown modestly, it's still below its 2018 high of $6.1 billion.

Metric

2017

2020

Change

Revenue

$15.0 billion

$14.5 billion

(3%)

Free cash flow

$4.7 billion

$5.5 billion

15%

Data source: Texas Instruments SEC Filings.

Despite the slow growth, Texas Instruments has still created value for shareholders through stock repurchases and dividend payouts. In fact, the company has reduced its share count by 46% since 2004, driving free cash flow per share growth of 12% per year over the same period. Likewise, Texas Instruments has increased its dividend for 17 consecutive years, with an average bump of 26% per year. That's an impressive track record.

Which stock is the better buy?

Presently, shares of Texas Instruments trade at 30 times earnings. That might sound a little pricey, but compared to NVIDIA's 98 times earnings, it's quite cheap. However, this discounted valuation reflects the company's slow sales growth and relatively limited market opportunity.

NVIDIA on the other hand is growing much more quickly. And more importantly, NVIDIA competes in markets that are also growing quickly, like high-performance computing and artificial intelligence. In other words, NVIDIA has more potential upside.

This is a tough comparison, so I'm going to take the easy way out. Investors looking for a relatively safe, dividend-paying tech stock should consider Texas Instruments. The company has historically done a great job creating value for shareholders. However, for growth-focused investors, NVIDIA looks like a long-term winner.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.