Many believe that the chip shortage won’t be resolved until sometime next year and will involve significant investments in new capacity. In the interim, semiconductors will benefit from increased pricing power and higher margins.
 
Analog Devices (ADI) and Texas Instruments (TXN) are two of the higher-quality semiconductor stocks.
 
ADI

ADI, based in Norwood, MA, is an original equipment manufacturer of semiconductors with a particular focus on analog, digital signal processing and mixed signal integrated circuits. ADI’s products include comparators, amplifiers, converters, encoders, decoders and more.

Take a close look at ADI’s facts and figures and you will find the company has a forward P/E ratio of 26.79. This is a slightly elevated ratio. However, ADI is trading at $169 and change, a mere $3 away from its 52-week high of $172.45. The stock’s 52-week low is $110.47. The fact that the stock’s current price point is slightly below its high for the year is an indication that the forward P/E ratio bordering on 30 is not much cause for concern. ADI has a beta of 1.25 so it probably won’t significantly fluctuate should the market spike or drop by a significant amount.

ADI has a C POWR Rating grade. The stock has a B Quality component rating along with Cs in the Momentum, Value and Growth components. If you are curious as to how ADI fares in the rest of the POWR Ratings components such as Sentiment and Stability, you can find out by clicking here.

ADI is ranked in the top half of the Semiconductor & Wireless Chip category, slotting in at 44th out of 99 stocks. The sector as a whole has a B grade. You can learn more about the stocks in the category by clicking here.

The analysts believe good things are in store for ADI, setting an average target price of $184.95 for the stock. A move to this price point represents more than an 8% increase. The analysts’ highest target price for the stock is $200. The analysts’ lowest target price for ADI is $165. In the past 175 days, the average price target for ADI has increased $27.64.

TXN

TXN, headquartered in Dallas, TX, makes digital, analog and mixed signal processing integrated circuits. The company has facilities for wafer fabrication and test/assembly located in several continents.

If the analysts are correct, TXN will rise to their average target price of $201.19. An upward move to this price point represents a nearly 5% gain. The highest analyst target price for TXN is $235. The lowest analyst target price for the stock is $155.

TXN has a forward P/E ratio of 25.84. This ratio is a bit high yet the company operates in the tech space so it shouldn’t be a deal-breaker for potential investors. The elevated ratio would be more concerning if TXN were priced well below its 52-week high. However, the stock is trading within $8 of this benchmark. TXN has a low beta of 1.03 so it should hold steady in the event that the market undulates.

TXN is ranked in the top third of its industry, slotting in at 28 out of 99 publicly traded companies in the Semiconductor & Wireless Chip space. Click here to find out more about the stocks in this sector.

TXN has a B POWR Rating with a B Sentiment component grade, an A Quality grade and Cs in the Stability and Growth components. Click here to learn more about TXN’s individual POWR Rating component grades such as Value and Momentum.

Which is the Better Buy?

Though both of these semiconductor stocks have their merits, TXN is the better play. TXN’s B POWR Rating grade signals the stock is a Buy. In comparison, ADI has a C POWR Rating grade.