Microchips (also called integrated circuits, semiconductor chips, or just plain old "chips") are like an invisible force powering our everyday lives. Chips are there when we work, drive, play, and communicate.
The global semiconductor market will exceed $600 billion in 2022, and one study estimates it will reach $1.4 trillion by the end of this decade. This is a far cry from the $33 billion market companies vied for in 1987, as shown below. While the industry is cyclical, the long-term trend is relentlessly higher.
Source: Statista.
The (mostly) bipartisan Chips and Science Act recently passed by Congress includes $52 billion to help support and expand U.S. semiconductor companies and other tax credits to bolster manufacturing. The bill could provide a tremendous boost when the industry and economy need it. And any money the company receives or saves will ultimately benefit its shareholders.
If you're in the market for microchip stocks, consider putting these two stocks on your list.
1. Texas Instruments: The cash flow king
Texas Instruments (TXN 0.25%) does more than make scientific calculators. The company is a leader in designing and manufacturing chips, focusing on the ones used in industrial and automotive applications. Its executives pride themselves on being the best cash management team in the business -- and they back it up.
The company has done well for years and generates enough free cash flow to fund a growing dividend. That quarterly dividend payout of $1.15 per share has been increased annually since 2004 at a compound annual growth rate (CAGR) of 25%, as shown below.
Texas Instruments has also reduced the share count by 46% over this 18-year period through stock buybacks. It can do this because its business model is highly profitable and the products are in demand. Texas Instruments could be the ticket for dividend-growth investors, tech investors, or retirees.
2. Nvidia: Powering the future
Those looking for more growth-oriented stocks should consider Nvidia (NVDA 3.71%). Its rise to stardom has been remarkable. The company has grown revenue from $6.9 billion to nearly $27 billion in just five fiscal years. The stock has skyrocketed more than 350% over the past five years, despite being down nearly 46% from its 52-week high.
Nvidia has built its fortress on the back of high-performance GPUs (graphic processing units) for video games and expanded offerings into the high-growth artificial intelligence (AI) field with its data center products, as shown in the chart below.
Data source: Nvidia. Chart by author.
The expanded offerings and organic growth powered a 61% increase in revenue and 87% increase in operating income in fiscal 2022.
Investors pay a hefty price for this growth. The company has a forward price-to-earnings ratio (P/E) over 35, compared to just 19 for Texas Instruments. Nvidia is most appropriate for aggressive long-term growth investors.
The microchip industry has something for everyone if you have some cash to invest. Risk-averse investors focused on income should love Texas Instruments, while intrepid investors who don't mind volatility could make terrific returns long term with Nvidia stock. Of course, nothing says you have to pick just one.
