Finding worthwhile investment ideas can be difficult, but one solid approach is to look for companies that have achieved a market-leading position in an important industry. Enterprises like Texas Instruments (TXN +2.87%) and Adobe Systems (ADBE 2.13%) fit that description, and both could be long-term winners for patient investors. Here's why.
1. Texas Instruments: The chipmaker
Texas Instruments designs and manufactures roughly 80,000 different types of semiconductors (chips) for over 100,000 customers. Specifically, the company is the market leader in analog chips and embedded processors, mostly for use in automotive, industrial, and consumer electronics products.
Image source: Texas Instruments.
While analog chips don't receive as much attention as digital chips -- like the processors made by Intel -- analog chips are just as important. In fact, analog chips are present in every electronic device.
One of Texas Instruments' greatest advantages is its wafer fabrication facilities. The first step in semiconductor manufacturing is wafer fabrication, where many chips are created on a single silicon wafer. And while many rivals use a 200-millimeter process, two of Texas Instruments' facilities support 300-millimeter wafer production. The end result is more chips per wafer, which translates into a 40% lower cost per chip for Texas Instruments.
That advantage has helped the company capture 19% of the analog chip market, nearly double the market share of its next closest competitor. And as the industry leader, Texas Instruments generates more revenue than its rivals, meaning the company can invest more heavily in research and development. Ultimately, this should help Texas Instruments protect its business and maintain its lead.
While top-line growth has been sluggish in recent years, the company has still created value for shareholders. Since 2004, Texas Instruments has repurchased 46% of outstanding shares, reducing its share count from 1.7 billion to 919 million. As a result, free cash flow per share has grown at 12% per year since 2004. In other words, this company has consistently boosted its profitability.
As a final thought, Texas Instruments ended fiscal 2020 with strong fourth-quarter results. Particularly significant was its top-line growth, which clocked in at 22% -- a big improvement over the 10% drop in revenue from the same period in 2019. That's encouraging, but investors should still pay attention to the company's top line in the future. If revenue starts trending in the wrong direction, it could be a red flag.
2. Adobe Systems: The digital canvas
Adobe Creative Cloud is a collection of applications that help creative professionals turn inspiration into reality, providing tools for a range of use cases. Whether you need to edit an image, design a website or mobile app, create social media content, or add cinematic special effects to a video, Adobe's software simplifies the process.
Adobe's robust portfolio of creativity tools is unmatched by any rival. As a result, the company's products have achieved widespread adoption. For example, more than 90% of global creative professionals use Photoshop.
Image source: Getty Images.
Adobe Document Cloud is a suite of software tools centered around PDFs, and it aims to improve enterprise productivity. For instance, digital documents created, signed, shared, and stored in Document Cloud reduce costs by 90% compared to paper documents.
One example is Adobe Sign, an e-signature solution that allows enterprises to easily capture legally binding digital signatures. This streamlines workflow, especially in cases where individuals are working remotely. Moreover, despite competition from DocuSign, the product is gaining traction -- Adobe Sign usage jumped over 200% in 2020.
Artificial intelligence is central to Adobe's growth strategy and competitive advantage. By infusing AI into its products, Adobe can automate repetitive tasks, make predictive recommendations, and generally accelerate workflow. As a result, the company's AI framework (Adobe Sensei) is the foundation on which all of its products are built. And in the most recent earnings call, management reiterated its commitment to expanding Adobe's AI-powered tools, which should reinforce the company's advantage over time.
Despite a market cap of $211 billion, Adobe has posted truly impressive growth in revenue and free cash flow in recent years.
|
Metric |
2016 |
2020 |
CAGR |
|---|---|---|---|
|
Revenue |
$5.9 billion |
$12.9 billion |
22% |
|
Free cash flow |
$2.0 billion |
$5.3 billion |
28% |
Data source: Adobe SEC filings. CAGR: Compound annual growth rate.
Adobe remains well-positioned to continue growing quickly. Management estimates the company's market opportunity will reach $147 billion by 2023. And as more enterprises adopt a digital-first business model, Adobe should be a valuable partner in helping them create more efficiently, work more productively, and engage with consumers more effectively.
