Pandemic-driven supply chain disruptions have negatively affected numerous industries, reducing inventory levels and putting inflationary pressure on the economy. However, that situation has actually been a tailwind for chipmakers. In fact, global semiconductor revenue skyrocketed 25% in 2021, topping $500 billion for the first time, according to research company Gartner.
More importantly, semiconductors play a critical role in virtually every sector of the economy, from established industries like auto manufacturing and consumer electronics to emerging technologies like artificial intelligence and the metaverse. And as the world becomes increasingly digital and applications become more data-intensive, the need for semiconductors should accelerate.
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With that in mind, Nvidia (NVDA 6.18%) and Texas Instruments (TXN 1.27%) look like two smart long-term investments. Here's why.
1. Nvidia
Nvidia is best known for inventing the graphics processing unit (GPU), a chip that has revolutionized the film and gaming industries with ultra-realistic graphic experiences. Nvidia's technology has also taken hold in data centers, where GPUs power-intensive workloads like artificial intelligence and data analytics applications. In fact, the company currently holds over 90% market share in the supercomputer accelerator industry.
However, Nvidia's compute platform extends beyond hardware. The company recently launched AI Enterprise, a suite of software that helps clients build and deploy AI-powered applications across private data centers, hybrid clouds, and multi-cloud environments. Similarly, Nvidia Omniverse, a subscription service that allows 3D creators to collaborate in a shared virtual world, went live in the second quarter. Omniverse also works as a simulation engine, meaning it can be used to train AI models for use cases like self-driving cars and autonomous robots.
Financially, Nvidia's performance has been strong. During the third quarter, revenue rose 50% to $7.1 billion, powered by record sales in the gaming and data center segments. And earnings soared 83% to $0.97 per diluted share.
Despite its $571 billion market cap, Nvidia still has plenty of room to grow. Forrester Research recently noted that Nvidia GPUs are synonymous with AI infrastructure, and that edge should keep the company at the forefront of the supercomputing industry. Additionally, the Omniverse platform should make Nvidia a key player in the metaverse, an industry that could be worth $30 trillion by 2030. That's why this semiconductor stock belongs in your portfolio.
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2. Texas Instruments
Texas Instruments specializes in analog chips and embedded processors, serving over 100,000 clients across six key end markets, the largest of which are industrials, personal electronics, and automotive (including the high-growth electric vehicle industry). More importantly, analog chips are used in every electronic device, and embedded processors are used in most. Texas Instruments is the market leader in both cases.
Reinforcing that advantage are the company's numerous manufacturing facilities. Texas Instruments owns four wafer fabrication plants, and it recently announced plans to build two more, both of which could start production as early as 2025. At each of those plants, chips are produced on 300-millimeter silicon wafers, which reduces the per-chip manufacturing cost by 40% compared to the 200-millimeter technology used by most rivals. Additionally, Texas Instruments handles most assembling and testing internally, an advantage that helps it better control its supply chain.
To that end, the company has flourished during the semiconductor shortage, consistently delivering strong financial results. In the most recent quarter, revenue jumped 19% to $4.8 billion and earnings surged 26% to $2.27 per diluted share. Even more impressive, trailing-12-month cash from operations skyrocketed 43% to $8.8 billion.
Also noteworthy: Texas Instruments has increased its dividend for 18 consecutive years. In the first quarter of 2004, the payout was roughly $0.08 per share, but that figure has risen at 15% per year to $1.15 per share. Over the same time, Texas Instruments' stock price has climbed 520%, creating significant wealth for shareholders.
Looking ahead, the company's strong competitive position should fuel market-beating returns as the proliferation of digital devices continues to drive strong demand for analog chips and embedded processors. That's why this stock looks like a smart long-term investment.
