Intel (INTC -9.20%) and Texas Instruments (TXN 1.27%) represent two different ways to invest in the semiconductor market. Intel is the world's largest producer of x86 CPUs for PCs and data centers. Texas Instruments, or TI as it's sometimes called, produces a wide range of analog and embedded chips for the automotive, personal electronics, communications, and enterprise systems markets. Both companies are integrated device manufacturers (IDMs) which manufacture most of their own chips with their in-house foundries.
I compared these two blue-chip semiconductor makers back in April 2022 and concluded that TI was a better buy than Intel. TI's stock price has declined 9% since I made that call, while Intel's stock has tumbled 27%. Let's see if that trend will continue.
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Intel sees the light at the end of the tunnel
Over the past few years, Intel fell behind Taiwan Semiconductor Manufacturing (TSM 1.26%), the world's most advanced contract chipmaker, in the "process race" to manufacture smaller, denser, and more power-efficient chips. As it lost that lead, its rival Advanced Micro Devices -- which outsources its production to TSMC -- pulled ahead with more cost-efficient CPUs.
That's why Intel's share of the x86 CPU market plunged from 82.5% to 62.7% between the third quarters of 2016 and 2023, according to PassMark Software. The pandemic-induced surge in PC sales temporarily masked those problems, but they resurfaced after those tailwinds dissipated. In response, Intel's CEO Pat Gelsinger -- who took the helm in early 2021 -- doubled down on upgrading its first-party foundries in a bid to reclaim the process lead from TSMC by 2025.
But as Intel ramped up its spending, its revenue fell year over year over the past six consecutive quarters. Its sales of client computing chips (mainly for PCs) declined for eight straight quarters, while its sales of data center and AI (DCAI) chips dropped for five consecutive quarters. Analysts expect its revenue and adjusted EPS to decline 17% and 66%, respectively, for the full year.
That outlook is grim, but a few green shoots are appearing. Its sales of client computing and DCAI chips both improved sequentially last quarter, and Gelsinger expects the PC market to experience a "sustained recovery in the second half of the year." He also expects the upcoming launch of its Intel 4 node -- which is comparable to TSMC's 3nm to 5nm nodes -- to drive that growth. Its gross and operating margins have also been improving as it streamlines its spending.
Analysts expect all of those tailwinds to boost Intel's revenue and adjusted EPS by 12% and 184% in 2024 -- which would mark an end to its long and painful cyclical slowdown.
TI's spending plans are unnerving the bulls
TI doesn't have much exposure to the PC market, but the macro headwinds over the past year also caused the chipmaker's total revenue to decline year over year for three consecutive quarters. Its sales of analog chips fell during all three quarters, which offset its relatively stable sales of embedded chips.
TI's slowdown was caused by macroeconomic challenges across all of its end markets. But on a sequential basis, TI's revenue rose sequentially in the second quarter of 2023, driven by the quarter-over-quarter recovery of its automotive and personal electronics markets. However, analysts still expect its revenue and EPS to decline 10% and 22%, respectively, for the full year as the market gradually bottoms out.
TI isn't upgrading its plants as aggressively as Intel, but it's still pouring a lot of cash into its ongoing transition from 200mm to 300mm wafers for its analog chips -- which is aimed at reducing the long-term costs of its unpackaged parts by roughly 40%. As a result, its gross, operating, and free cash flow (FCF) margins have all declined over the past year.
In fact, TI's FCF came in at negative $47 million in the second quarter, which reduced its trailing-12-month FCF to $3.18 billion. That's less than half of the $6.5 billion TI returned to investors via buybacks and dividends over the past 12 months.
That's a red flag for the shareholder-friendly strategies which made TI such an attractive investment for conservative investors. During last quarter's conference call, CFO Rafael Lizardi warned that its recent spending, which was aimed at driving its revenue growth for "the next ten to 15 years" could continue to cause "short-term fluctuations" in its FCF growth. But looking further ahead, analysts expect TI's revenue and EPS to both grow 7% in 2024 as it reins in its spending and overcomes its cyclical headwinds.
Which chipmaker is the better buy?
Intel trades at 20 times next year's earnings, which seems like a reasonable valuation if it can successfully revive its massive business and catch up to TSMC. TI trades at 21 times next year's earnings.
Intel cut its dividend earlier this year to conserve more cash for the expansion of its foundries, but it still pays a forward yield of 1.4%. TI pays a much higher forward yield of 3%, and it's raised its payout annually for nearly two decades.
Both of these chipmakers face near-term challenges. However, Intel's turnaround strategy is still much riskier than TI's gradual expansion of its 300mm plants. That key difference, along with the higher dividend, makes TI a better buy than Intel.
