NVIDIA (NVDA -2.85%) and Texas Instruments (TXN 0.82%) are two of the world's most well-known chipmakers. NVIDIA is the largest producer of high-end gaming and data center GPUs, while Texas Instruments manufactures lower-end analog and embedded chips for various industries.

I compared these two stocks last August and said that NVIDIA's underlying tailwinds and stronger growth rates made it a better buy. But since then, NVIDIA's stock price has only risen about 10% as TI's stock price has jumped nearly 30%. Did I make the wrong call, or is NVIDIA still a better long-term play?

Two very different chipmakers

NVIDIA is a fabless chipmaker that outsources the production of its chips to third-party foundries like Taiwan Semiconductor Manufacturing (TSM 0.01%) and Samsung. This approach reduces its operating expenses, but it also leaves it more exposed to the semiconductor shortage as the top foundries struggle to manufacture enough chips.

An illustration of a semiconductor.

Image source: Getty Images.

Texas Instruments is an integrated device manufacturer (IDM) that manufactures its own chips with its internal foundries. This approach has insulated TI from the semiconductor shortage, but its clients could still postpone their orders due to shortages of other companies' chips.

NVIDIA generates most of its revenue from gaming GPUs, but it's also been selling more data center GPUs in recent years for machine learning and AI tasks. It also sells Arm-based Tegra CPUs, which are primarily used in cars, set-top boxes, and Nintendo's Switch console.

NVIDIA expanded its data center business by buying the network equipment maker Mellanox a year ago, and it's currently trying to buy Arm Holdings to become the world's largest mobile chip designer.

Texas Instruments generates most of its revenue from analog and embedded chips. These chips aren't as powerful as CPUs or GPUs, but they support a wide range of power management and wireless functions.

TI generates most of its growth from the industrial and automotive markets, which together accounted for 57% of its revenue last year. The rest of its revenue mainly comes from the personal electronics, communications equipment, and enterprise system markets.

How did the pandemic affect the two companies?

The pandemic generated strong tailwinds for NVIDIA as sales of its gaming and data center GPUs surged throughout the crisis. People played more games while staying at home, and the elevated usage of cloud-based services caused data center operators to buy faster GPUs. Its takeover of Mellanox also significantly boosted its data center revenue.

As a result, NVIDIA's revenue soared 53% to $16.7 billion in fiscal 2021, which ended this January, as its adjusted net income jumped 75% to $6.3 billion. Last month, it claimed its revenue growth for the first quarter of 2022 was "tracking above" its previous outlook for 72% year-over-year growth.

Analysts expect NVIDIA's revenue and adjusted earnings to rise 34% and 36%, respectively, for the full year, as it laps the Mellanox acquisition and faces tougher comparisons to its pandemic-induced growth last year.

A concept of a next-gen vehicle.

Image source: Getty Images.

Meanwhile, the pandemic generated fierce headwinds for TI by disrupting its industrial and automotive markets. Higher sales of chips for consumer electronics and healthcare devices partly cushioned the blow, but its revenue still rose less than 1% to $14.5 billion in fiscal 2020, which aligned with the calendar year.

Yet TI's gross margin still expanded, thanks to its cost-cutting transition from 200mm to 300mm wafers. Those stable margins, along with lower operating costs throughout the pandemic, boosted its full-year net income by 12% to $5.6 billion.

TI's revenue rose 29% year over year in the first quarter, and its net income jumped another 49% as its industrial and auto businesses recovered. It expects that recovery to continue with 28%-38% year-over-year revenue growth in the second quarter, while analysts expect its revenue and earnings to rise 21% and 28%, respectively, for the full year.

NVIDIA is still the long-term winner

Texas Instruments trades at 23 times forward earnings and pays a forward dividend yield of 2.2%. NVIDIA has a higher forward P/E ratio of 37 and a much lower forward yield of 0.1%.

Over the next few quarters, TI's lower valuation and higher yield could attract more investors as rising bond yields and a preference for post-pandemic recovery plays spark a rotation out of last year's high-growth darlings. TI's dedication to spending all of its free cash flow on buybacks and dividends could also make it a good defensive stock for a volatile market.

But over the long term, I believe NVIDIA will still generate bigger returns than TI because it serves higher-growth markets and it's far more ambitious. Sales of its gaming and data center GPUs will continue to rise for years as video games and cloud-based services become more demanding. It could also loosen Intel's grip on the server market with its new Arm-based data center CPUs, and become a mighty gatekeeper to the mobile chip market by acquiring Arm's designs and licenses.

I think both these semiconductor stocks are solid long-term investments. But if I had to choose one over the other, I'd buy NVIDIA right now, because it still has a lot more growth potential than TI.