Texas Instruments (TXN 0.25%) and Taiwan Semiconductor Manufacturing (TSM 2.71%) are two of the most important companies in the world, and their importance is only rising. They are also incredibly important stocks to countless investors. Chips are proliferating throughout the economy and receiving massive amounts of capital investment -- everything from automotive and industrial automation (Texas Instruments' specialty) to data centers and artificial intelligence, or AI (a top end-market for Taiwan Semiconductor Manufacturing).
Taiwan Semiconductor Manufacturing (TSMC) is by far the larger of the two businesses and is an inseparable partner for all of the top fabless chip designers (those that don't manufacture themselves, like Nvidia, Qualcomm, and Apple, to name just a few). But could a case be made that Texas Instruments (TI), a company that focuses on "old and boring" chip technology, is actually the better investment? Below, two Fool.com contributors take opposing sides on this debate.
Texas Instruments has spent decades building a moat around its business
Jason Hall: In general, the analog semiconductor industry (a chip that can interact with a real-world signal, like sound waves, light, radio waves, etc.) is misunderstood. Much of TI's spending is on strengthening its moats (a defensive advantage it has over competitors), including manufacturing cost efficiency. In contrast, TSMC is largely spending because it has to stay at the leading edge of the technology curve. It's maintaining an edge while TI is sharpening its edge. And that's the secret to continued superior economic returns for investors.
For example, since the beginning of 2018, both companies have greatly expanded their capital spending (on equipment and property) to expand manufacturing capacity. But TI has doubled its dividend payment over that span of time, while TSMC slashed its dividend to help fund those capital expenditures.
Data by YCharts.
TI probably has some of the strongest economic moats in the semiconductor industry, ironically because it's focused on "boring" industrial and automotive markets. Those industries prioritize durability and replaceability.
Think about auto parts stores: They sell thousands of different low-cost parts for vehicles that have been on the road for decades. It's the same thing in industrial equipment and manufacturing. You can't replace a million-dollar machine because a $100 chip is no longer available.
Companies keep going back to TI because it's a reliable partner that helps them keep their industrial operations running smoothly. None of this mentions the e-commerce business TI has created, which makes it easy for its customers to order the parts it needs from an expansive catalog with the rare need to ask for a custom design to be made. This is a massive advantage that's not going away, and a difficult (and expensive) model to try to imitate.
Taiwan Semiconductor has some incredible competitive advantages, too
Nicholas Rossolillo: Let's not take too much away from what TSMC is doing, because the world would suffer unimaginable disruption if this company were to suddenly be taken out of commission. TSMC has deep pockets, and as long as it keeps using those deep pockets to maintain its incredible lead in the most advanced chipmaking capabilities around, numerous fabless chip designers will keep going back to TSMC as their preferred manufacturing partner.
Data by YCharts.
Of course, companies like Samsung have been investing heavily to catch up to TSMC. And though the company's in pitiful condition right now, a lot of the world's need to diversify global supply chains hinge on Intel turning things around and creating a TSMC-like business model that caters to other chip designers.
But this is the secret ingredient that makes TSMC special. Samsung has a foundry business for other chip designers, and Intel wants a bigger foundry business to cater to its peers, too, but both Samsung and Intel also compete with their foundry customers. They make chips for themselves and market them to consumers. For example, Samsung might offer to manufacture smartphone chips for another company, but it sells its own smartphones, too. Intel might offer to manufacture chips for, say, Nvidia, but it has competing silicon designs of its own.
TSMC doesn't have this problem. The only chips it manufactures are those of its chip design partners, freeing it up to focus on customer service. And that's how it has built itself into the undisputed market share leader in advanced chip manufacturing (over half of the global advanced chip fabrication market belongs to TSMC).
Why TI could be the better stock
As great as these top two semiconductor stocks are, though, TI's long-term performance has been untouchable in the chip manufacturing space. Since 2004 (when current but soon retiring TI CEO Rich Templeton took over, and long before TSMC was a powerhouse manufacturer), TI's profit margin has soared, leading to free-cash-flow-per-share growth that is double that of TSMC. If you're looking for a shareholder-friendly company (one that pays a rising dividend and uses any leftover free cash flow to repurchase stock), Texas Instruments is an elite company very few businesses can rival.
Data by YCharts.
Taiwan Semiconductor Manufacturing is an absolutely wonderful company, and shareholders will likely be very happy owning it, too. But Texas Instruments could be the better investment for investors looking for a buy-it-and-forget-it stock to hold for the long term.
