Nvidia Stock Vs Texas Instruments: Which Is Best?

Nvidia Corporation [NASDAQ: NVDA] and Texas Instruments [NASDAQ: TXN] are titans of the semiconductor industry. Billion dollar market capitalizations and a slew of products that keep our devices ticking over under the surface without most of knowing how they work at all.

These two companies build the building blocks that power the technology revolution. Everything from virtual reality gaming to AWS servers are depending on semiconductor technology, from iPhones to cloud computing.

But if you had to choose just one which would be be: Nvidia stock vs Texas Instruments?

Nvidia 101

Nvidia Corporation [NASDAQ: NVDA], pronounced as ‘invidia’, is an American multinational technology company, which engages in the design, development and manufacture of computer graphics processors, chipsets, and related software.

In addition to Advanced Micro Devices (AMD), its competitors include Intel and Qualcomm [QCOM]. The Santa Clara, California-based company, formed by Jen-Hsun Huang, Chris Malachowsky, and Curtis Priem in January 1993, is the worldwide leader in visual computing technologies and the inventor of the graphic processing unit (GPU). 

GPUs, commonly referred to as graphics cards or video cards, are specifically designed to accelerate computer graphics workloads.

A GPU performs quick math calculations and frees up the CPU to do other things. Whereas a CPU consists of four to eight cores focused on sequential serial processing, a GPU consists of thousands of smaller cores made for parallel processing.

The massively parallel processing power of the GPU makes it ideal for rendering images, video and 2D or 3D animations. 

It operates through two segments: 

• Graphics Processing Unit (GPU) and
• Tegra Processor.

The GPU segment comprises processors, which include GeForce for gamers; Quadro for professional graphics content designers and digital artists; GeForce NOW for cloud-based gaming Tesla and DGX that helps run simulations and deep learning algorithms for AI data scientists and scientific-research computers; GRID for cloud-based visual computing users’ and EGX for accelerated AI computing.

Its Tegra line of system-on-a-chip (combining a GPU and a CPU into one chip) is designed to support mobile gaming, entertainment devices, drones, artificial intelligence, supercomputing for autonomous robots, and—most importantly—self-driving cars. 

The chip maker, in 2016, announced that the Tegra processor would be used in all Tesla Motors (TSLA) vehicles.

The company, initially, was without a name and the founders named all their files NV, as in “next version”, which is how the founders viewed their company in the tech world.

They added the word ‘invidia’ at the end, which is the Latin word for envy. By putting those words together, the founders came up with Nvidia. 

Texas Instruments 101

Texas Instruments Incorporated [NASDAQ: TXN] is a U.S. technology company that designs, manufactures, tests and sells analog and embedded semiconductors in industrial, personal electronics, automotive, personal electronics, communications equipment and other markets. 

It operates in two segments:

• Analog
• Embedded Processing.

Its product portfolio in this segment includes high-volume analog and logic, and high-performance analog and power management. 

The Embedded Processing segment includes TI’s OMAP, connectivity solutions, non-wireless digital signal processing and microcontrollers. The company has been advancing IC technology and the ability to reliably produce ICs in high volumes for decades.

It is often said that the history of Texas Instruments (TI) is very closely associated with the American electronics industry. TI produced the world’s first silicon transistor in 1954, and the first transistor radio the same year. It was a TI engineer, Jack Kilby, who invented the first semiconductor integrated circuit in 1958, and introduced the first single-chip microcontroller (an assembly of electronic components, fabricated as a single unit onto one piece of silicon) in 1970, which helped fuel the modern electronics revolution.

TI also invented the hand-held calculator in 1967. The company, which traces its roots to Geophysical Service, a petroleum-exploration firm founded in 1930, is based in Dallas, Texas.

Is Nvidia Stock A Buy?

Tech giants (also known as Big Tech or Big Five) such as Alphabet [GOOG] Apple [AAPL], Amazon [AMZN], Microsoft [MSFT] and Facebook [FB], have recently found themselves under constant spotlight as they were responsible for pushing the NASDAQ to ever higher heights.

Amidst all the headlines grabbing by these tech giants, Nvidia, which makes some of the technologies that work behind the scenes, has been quietly enjoying an excellent year without all the hype and hoopla associated with the Big Five.

The company, known for high-performance graphics processing units and parallel processing technology, has evolved over the last few years, with its sophisticated GPUs and chips defining the next era of computing.

Nvidia stock has been a beast, marching on at an incredible pace with new businesses generating record revenue in the second quarter of fiscal 2020, and taking the chip maker to new all-time highs.

Nvidia even moved past Intel [NASDAQ: INTC] in market capitalization. Whether it is corporate workstations and data centers; self-driving cars; drones; supercomputing; cloud computing or autonomous robots, the company has been quick to move beyond its traditional strength of gaming, and into new markets at a swift pace.

After the company delivered above expectations in its second quarter, many investors might be wondering if they should add the stock to their portfolio or let go the expensive stock which is trading at a historically high valuation.

Will NVDA Stock Go Up?

Nvidia’s stock crashed in late 2018, with a disappointing third-quarter earnings report which came way below expectations. It had a lot to do with bitcoin as bitcoin speculators were buying Nvidia’s high-performance gaming graphics cards in droves to help mine bitcoin.

A crash in demand for bitcoin dragged down the sale of the company’s graphic cards, leading to a sharp decline in its revenue.

The company was back in its groove in mid-2019 and, since then, it hasn’t stopped shattering records. It was quick to realize its limitations and, as such, took great pains to expand its horizons. It decided to explore new territories, one beyond gaming chips, to AI, cloud computing, deep learning, virtual desktops and much more.

The company built out many solid growth units which has powered Nvidia to new heights. The stock, trading at less than $150 in May, shot up to more than $480 in August 2020.

Nvidia Enjoys Booming Data Center Revenue

Riding on strong gaming and data center sales, NVIDIA, for the second quarter ended July 26, 2020, reported record revenues of $3.87 billion, up 50 percent from $2.58 billion a year earlier, and up 26 percent from $3.08 billion in the previous quarter.

The chip maker reported $2.18 EPS for the quarter, up 76 percent from $1.24 a year earlier, and up 21 percent from $1.80 in the previous quarter. Most importantly, what stood out amidst all the record-shattering jamboree was the fact that data center sales jumped 167% to $1.75 billion, topping gaming sales for the first time in the company’s history.

As it turned out, Nvidia’s gaming segment – the company’s bread and butter – was dethroned by revenue from its data center segment.

The key to growth has been Nvidia’s CUDA (Compute Unified Device Architecture), a parallel computing platform and application programming interface model developed by the company and introduced in 2006.

CUDA can be used with several different programming languages, though it only runs on its range of CUDA-enabled graphics cards.

Parallel computing enables computers to break down tasks into smaller parts and perform computation on them simultaneously. 

Experts opine parallel computing is the future of computing in general, and AI in particular. Data centers are eagerly lapping up this technology to enable their computers to perform tasks faster and more efficiently.

Acquisition Of Mellanox Was A Masterstroke

Another major cause of the incredible jump in revenue was owing to Nvidia’s acquisition of Mellanox Technologies Ltd. on April 27, 2020 for $6.9 billion.

Mellanox makes high-performance computing equipment found in servers and supercomputers around the world.

This reporting period was the first full quarter in which Mellanox contributed to Nvidia’s revenue, bringing in 14% of Nvidia’s total revenue and more than 30% of data center revenue, thus reinforcing Nvidia’s image as a savvy dealmaker as it prepares for a leadership position in AI and deep learning.

Nvidia’s Blockbuster Acquisition Of Arm Holdings

In a move that has significant implications for the tech industry, the U.S.-based graphics chip maker announced in September that it would purchase U.K.-based Arm Holdings from Japanese investment firm, Softbank, in a transaction valued at $40 billion. SoftBank bought Arm in 2016 for $31 billion.

Arm Holdings is the enterprise behind Arm Processors, the smart sensor chips, which helps power over 90% of the world’s smartphones, with its clients including Apple, Samsung, and Qualcomm [QCOM].

The Cambridge-based company does not have its own manufacturing facilities, instead choosing to license its chip designs to any company, which, in turn, manufactures them.

The purchase would complement NVDA’s existing GPU and data center networking businesses and allow it to expand into large, high-growth markets.

Intel made a similar move when it acquired Movidius, a specialized chip designer focused on building hardware for AI and machine learning applications.

Flourishing Gaming Business

One important thing to note here is that Nvidia, despite its booming data center business, has not put its gaming business on the backburner.

Management believes that gaming will wrest back the crown next quarter as lockdowns around the world lead to record surge in the gaming market.

This quarter, gaming revenue jumped 26% year over year $1.65 billion, and the company expects that holiday shopping will provide added impetus to this segment. Nintendo [NTDOF], the Japanese multinational consumer electronics and video game company, had a record-breaking quarter which, in turn, greatly contributed to Nvidia’s cause as the Japanese company’s Switch consoles contain Nvidia chips.

With the gaming and data center segments touching new heights, analysts expect Nvidia’s next quarter (around mid-November) earnings to rise 44% to $2.56 and revenue to register a 46% increase to $4.41 billion.

For the whole year, earnings are expected to grow an even more impressive 57% and a further 20% in 2022. Also, analysts expect 44.5% revenue growth this year to $15.77 billion.

Nvidia grew sales by 45% over the past three quarters, whereas EPS growth has averaged 105%, and by 9% over the past three years.

Is Texas Instruments A Buy?

For decades, high school students in the USA, and globally, have been using Texas Instruments‘ line of graphing calculators for solving algebra, trigonometry and geometry problems, but then calculators are not the only thing that TI makes.

The fabled technology company designs and manufactures analog and embedded processors, which are basic building blocks found in almost all electronic devices ranging from smartphones and tablets to military defense systems.

Analog chips are small electronic circuits which can read and process waveforms such as speech, music and video and convert them into digital signals. 

Embedded processors are essentially tiny computers that use simple microprocessors. They are common in automobiles, industrial automation and in household appliances.

The competition is fierce in this segment with both, small and big players, vying for a larger share of the pie. However, it should be noted that the semiconductor veteran has been around since 1930, successfully surviving several economic downturns and industry cycles, which, in turn, attests to its staying power.

Its expertise, extensive product breadth and a terrific capital allocation record has allowed it to build sustainable competitive advantage and receive more traffic in comparison to its competitors.

The company’s extensive product portfolio allows it to adequately take care of the needs of any consumer electronics manufacturer in the world. Add to that, its ability to generate a healthy cash flow stream, a large portion of which the semiconductor maker distributes in the form of dividend, and you will understand why it is such a dependable stock. 

The company’s range of products across markets frees it from being overly dependent on a single technology or customer for its revenue and profitability. This, in turn, allows the management to concentrate on devising strategies for the company’s growth.

It is amply reflected in the semiconductor manufacturer’s high operating margins, which have been consistently growing in the last few years.

Despite all these, Texas Instruments has been struggling of late along with the rest of the semiconductor industry.

Just as it looked like things were getting slightly better for the 90-year-old chip behemoth, Covid-19 struck, sending revenue and earnings tumbling south. 

EPS in the second quarter slid 15% whereas weakness in the auto market caused the revenue to dip 12% to $3.24 billion.

However, prospects of the analog and embedded processor took a turn for the better in the latest quarter, with sales turning positive after seven straight down quarters as the global shift to work-from-home increased demand for chips used in tablets, personal computers and servers.

The semiconductor company reported $1.45 earnings per share for the quarter on sales of $3.82 billion. Analysts expected EPS of $1.27 on sales of $3.44 billion. The Dallas-based company’s quarterly revenue was up 1.3% compared to the same quarter last year. During the same period last year, the firm earned $1.49 EPS.

TI often reports quarterly results before its peers. Investors take a keen interest in its results as it serves as a general indicator of the health of the industry as well as sectors where semiconductors are important components.

TI Has 80,000+ Products In Its Portfolio

The company has been focusing on its transition to 300-millimeter wafers (which roughly makes up 50% of its analog revenue) to obtain competitive advantage over its rivals that mostly manufacture 200-millimeter wafers. Also, 300-millimeter wafers offer better margins in comparison to 200-millimeter wafer chips.

Additionally, the company has more than 80,000 products in its mammoth portfolio, thus making it a one-stop destination for a large number of industries for their many different needs.

Also, its products enjoy long shelf life which leads to  decreased R&D expenses. All these factors, along with a large and deep sales channel, help Texas Instruments produce affordable chips with very attractive margins.

To top it all, the company has been continuously shifting from wireless chips and personal electronics to the analog and embedded segments, two sectors poised for robust growth with industrial and automotive end markets leading the charge.

Embedded and analog chips constituted 50% of the portfolio in 2008, whereas they make up around 90% of the portfolio today.

TI Is Excellent At Capital Allocation

Texas Instruments is renowned for its disciplined capital allocation.

The management is deeply concerned about the company’s free cash flow per share, nothing short of a sweet lullaby for dividend investors’ ears, as a company can maintain its dividends only from its free cash flow.

All in all, a high free cash flow margin, wide product portfolio, excellent dividend yield and its focus on new technologies with potential for high return, makes it one of the best tech stocks to own for the long haul.

Nvidia vs Texas Instruments: The Bottom Line

The Case For Nvidia

Nvidia is a company perhaps best known for its graphics cards that enable highly resource intensive modern video games. However, it is not the company to rest on its laurels or be content with a dominant position in a particular segment.

To prove its point, the GPU maker, over the years, has developed technology deemed essential for everything, from automated cars to drones, AI and cryptocurrency mining to cloud computing, to name a few. The demand from these new areas has been so intense that a run on Nvidia cards by bitcoin in 2018 triggered a global shortage.

And just like the passing of the headiest days of the bitcoin boom may have hurt the company’s business back then, Nvidia’s automotive segment revenue suffered a sharp decline in comparison to the prior year owing to a dip in automobile production. Nvidia’s chips are used in self-driving cars.

And, just like the bitcoin bust wasn’t Nvidia’s fault, so is the case with automobile production. What it means is that the production is likely to pick up pace sooner than later and with this Nvidia’s revenue is also going to increase.

For example, the company’s lucrative autonomous vehicle segment got a shot in the arm with a recently announced deal with German luxury automaker Mercedes-Benz that is going to put an Nvidia chip in every vehicle that rolls off the factory line starting 2024.

Additionally, Nvidia’s newest GPU is based on the company’s Ampere architecture, which is extensively being used in data centers around the world. The company is soon going to unveil the new Ampere gaming cards, which is likely to boost its demand from gamers who are not ready to settle for anything less than the best gaming hardware.

Apart from these, the most significant factor that gives the semiconductor giant the potential to be the dominant player in the industry in the foreseeable future is its blockbuster acquisition of British premier chip designer Arm Ltd, which labels itself as the “Switzerland of Chips”.

There are many reasons as to why Nvidia purchased Arm for such a hefty price tag. First and foremost, it has been enjoying an exceptional run as demand for its products that serve the data center and video gaming markets has soared as the contagion spread. 

As a result, Nvidia has attained substantially more financial firepower, with its soaring stock price taking the company’s market capitalization to about $300 billion — roughly 50% more than that of the prior semiconductor king Intel Corp.

In fact, Nvidia’s stock has been the second-best performing stock in the entire S&P 500 Index, just behind Carrier Global Corp, the company that offers air-conditioning and refrigeration solutions.

More importantly, Nvidia has been venturing out into new fields, positioning itself as the chip maker of the future with focus on providing key components for high-growth opportunities such as automation, AI, robotics and IoT, to name a few.

Despite the fact that Nvidia’s advanced graphics chips are considered crucial for these applications, the company always had to deal with the heartburn of not having its own CPU making capabilities. What it means is that its customers could not shop for GPU and CPU under the same roof.

This was clearly evident this year when Nvidia had to use the server chip made by its biggest rival, Advanced Micro Devices Inc. for its latest artificial intelligence computer system, as it did not possess the capability to offer its own.

By acquiring Arm, which offers chip design and technologies for general processors, the company would find itself in a unique position of having the chip making capabilities across mobile phones, computers and data centers.

However, because it is such a big deal, it would require regulatory approval from the US, China and the European Union.

The US is most likely to happily oblige as it will get to put a renowned chip designer under the banner of an American company. Obtaining consent from China may be a bit problematic given the current standoff between the two economic superpowers.

A record-shattering quarter and a solid jump in market capitalization, and that, too, amidst the pandemic and the global economic meltdown, speaks volume about the company and its highly amazing products line. Nvidia’s success this year is no fluke as the company is reaping the rewards of its remarkable innovation and smart investments in new technologies.

Perhaps, the only negative is its sky-high price tag which may keep some potential investors away. But in addition to the short-term stellar outlook, the prospective acquisition of Arm means the high valuation may be worth it in the long run.

The Case For Texas Instruments

Hopes from TI were already dim even before the pandemic struck, owing to poor growth in automotive chips and lukewarm chip sales to other markets last year. The pandemic further exacerbated its plight in the first half of 2020 by shutting down auto plants and choking its chip sales to most industrial markets.

However, its third-quarter report contained few silver linings as the chipmaker was able to reverse six straight quarters of revenue decline owing to strengthening demand for electronics from the stay-at-home market and robust demand for its chips from the healthcare sector.

The company didn’t issue a full year guidance, but analysts expect its revenue to slid 7% and earning1%, respectively, before rallying next year.

TI may be facing near terms headwinds, but the company is considered to be a dividend investor’s dream, and not without some solid reasons.  The company currently offers a solid 2.65% yield, having increased its dividend for 17 straight years in a row, with all the likelihood that it will continue to pay handsome dividend for years to come.

Since 2004, TI has raised its annual dividend per share from $0.09 to $3.60 and, to top it all, it recently hiked its dividend again by 13% to $4.08.  It should not come as a surprise though, as the company’s gross margin is holding steady, thanks to the money saved by shifting from 200mm to 300mm wafers. 

The analog chipmaker is also known for rewarding its shareholders through other means. For example, TI has been repurchasing shares since 2004 and plans to keep doing so throughout the crisis.

The outlook currently does not look too rosy for TI, but then we should not forget that this is a company which has successfully weathered many downturns in the past. It may be currently grappling with decline in automobile productions, but then production is going to rebound more sooner than later.

Texas Instruments is not a high-flying technology stock, but, nevertheless, a very dependable one. Investors willing to ignore its near-term challenges for future growth are poised for good rewards.

Its dividend yield is above average for the S&P 500, and the company has paid out more than 50% of its free cash flow to shareholders over the last four quarters. It has an extensive product portfolio and remains committed to investment in research and development along with a strong focus on expanding and upgrading its manufacturing capacity.

To sum it up, Texas Instruments is a well-managed business with a bright future in the world of “connected everything”, where its products are definitely going to enjoy higher demand in the automotive and broader industrial sectors as they elevate levels of automation in their factories.

All in all, TI is one of the most dependable and investor-friendly companies that offers an unbeatable combination of safety, growth prospects and lucrative dividends.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.