Texas Instruments Incorporated (TXN) is  a semiconductor design and manufacturing company that develops analog ICs and embedded processors worldwide. The company also provides Digital Light Processing (DLP) products for use in projectors to create HD images, calculators and application-specific integrated circuits. It sells its products through direct sales and distributors, as well as through its website.

Advanced Micro Devices, Inc. (AMD) is a semiconductor company that offers microprocessors, chipsets, graphics processing units (GPUs), server and embedded processors, semi-custom System-on-Chip (SoC) products, and technology for game consoles worldwide. The company also provides assembling, testing, and packaging services, and supplies its products to third-party foundries through its direct sales force and independent distributors.

The rising demand for semiconductors from several industries has helped the semiconductor industry generate  sales growth of 21.7% year-over-year to $41.8 billion in April 2021. Along with the continuing increase in demand, increasing government and private investments to address the semiconductor shortage should drive sales further. WSTS projects annual global semiconductor sales to increase 19.7% in 2021 and 8.8% in 2022. President Biden has proposed a $50 billion investment in the U.S. semiconductor industry to support domestic companies in ramping up their production. So, both TXN and AMD should benefit from the industry tailwinds.

While AMD gained 3.3% year-to-date, TXN surged 17.1%. But in terms of their past nine month’s performance, TXN is a clear winner with 36.2% gains versus AMD’s 15.8%. So, which of these stocks is a better pick now? Let’s find out.

Click here to checkout our Semiconductor Industry Report for 2021

Latest Movements

On June 30, 2021, TXN signed an agreement to acquire Micron Technology’s (MU) 300-mm semiconductor factory in Utah for $900 million.  As TXN’s fourth 300-mm chip factory, the facility will also focus on 65-nm and 45-nm production for analog and embedded processing products and TXN expects its first revenue from this plant in early 2023. TXN expects this acquisition, which was  made as part of its long-term capacity planning, will give the company greater control of  its supply chain.

In late June, TXN introduced HDC3020 and HDC3020-Q1 devices in a new family of humidity sensors that will provide the industry’s highest reliability and accuracy and lowest power consumption, along with built-in protection of sensing elements. Its ability to withstand potential damage caused by moisture will help engineers create more reliable industrial and automotive systems. TXN expects to generate  good sales with  these products in the near-term.

On June 22, AMD announced the availability of its cutting-edge spatial upscaling solution, AMD FidelityFX Super Resolution (FSR). AMD FSR is an open-source, cross-platform technology that is designed to boost frame rates and deliver high-quality, high-resolution gaming experiences. With more than 40 game developers announcing support for FSR in their games and/or game engines, AMD expects to expand its market reach  in the coming months.

On June 17, Alphabet Inc.’s (GOOGL) Google Cloud announced T2D, the first instance in the new family of Tau Virtual Machines (VMs) powered by AMD’s 3rd Gen AMD EPYC processors. According to Google Cloud, the T2D instance offers its customers 56% higher absolute performance and more than 40% higher price performance for scale-out workloads. Both companies are looking forward to a long-term partnership and capitalize on the growing demand from cloud and enterprise customers.

Recent Financial Results

TXN’s revenue for its fiscal first quarter, ended March 31, 2021, increased 28.8% year-over-year to $4.29 billion. The company’s gross profit came in at $2.80 billion, up 34% from the prior-year period. Its operating profit is reported at $1.94 billion, which represents a 55.9% year-over-year improvement. TXN’s net income increased 49.3% year-over-year to $1.75 billion. Its EPS increased 50.8% year-over-year to $1.87. The company had $2.44 billion in cash and cash equivalents as of March 31, 2021.

For its fiscal first quarter, ended March 27, 2021, AMD’s net revenue increased 92.9% year-over-year to $3.45 billion. The company’s non-GAAP gross profit came in at $1.59 billion, up 93.7% from the prior-year period. Its non-GAAP operating income came in at $762 million, which represents a 222.9% year-over-year rise. While its non-GAAP net income increased 189.2% year-over-year to $642 million, its non-GAAP EPS increased 188.9% year-over-year to $0.52. As of March 27, 2021, the company had $1.76 billion in total cash and cash equivalents.

Past and Expected Financial Performance

TXN’s EBIT and net income have grown at CAGRs of 1.5% and 15.1%, respectively, over the past three years. The company’s EPS has increased at a 18.4% CAGR over the past three years.

Analysts expect TXN’s revenue to increase 20.4% year-over-year in the current quarter (ending September 30, 2021), 21.3% in the current year, and 4.1% next year. Its EPS is expected to increase 31.9% year-over-year in the current quarter, 21% for the current year, and 6.1% next year. The stock’s EPS is expected to grow at 10% rate per annum over the next five years.

In comparison, AMD’s EBIT and net income grew at CAGRs of 99.3% and 228.9%, respectively, over the past three years. The company’s EPS grew at a 204.4% CAGR over the past three years.

Analysts expect AMD’s revenue to increase 35.6% in the current quarter (ending September 30, 2021), 50.5% in the current year, and 14.6% next year. Its EPS is expected to increase 34.4% year-over-year in the current quarter, 67.8% in the current year and 25.1% next year. Analysts expect the stock’s EPS to grow at a 32.4% rate per annum over the next five years.

Profitability

TXN’s trailing-12-month revenue is 1.3 times  AMD’s. TXN is also more profitable with a 47.6% EBITDA margin versus AMD’s 19.3%.

TXN’s ROE, ROA and ROTC values of 69%, 22.4% and 27%, respectively, compare favorably with AMD’s 60.6%, 14.7% and 21.7%.

Valuation

In terms of non-GAAP forward P/E, AMD is currently trading at 43.76x, which is 71.2% higher than TXN’s 25.56x.

Also, in terms of forward EV/EBITDA, AMD’s 32.17x is 64.6% higher than TXN’s 19.54x.

Thus, TXN is more affordable here.

POWR Ratings

While AMD has an overall C grade, which translates to Neutral in our proprietary POWR Ratings system, TXN has an overall B grade, which equates to Buy. The POWR Ratings are calculated considering 118 different factors, each weighted to an optimal degree.

TXN has an A grade for Quality, which is consistent with its higher-than-industry profitability ratios. The company’s 47.6% trailing-12-month EBITDA margin is 231.8% higher than the 14.4% industry average. In comparison, AMD’s C grade for Quality is in sync with its relatively lower profit margin. The company has a 19.3% EBITDA margin, which is 34.7% higher than the 14.4% industry average. In terms of Stability, TXN has been graded a C, in sync with the stock’s 1.03 beta. In comparison, AMD’s D grade for Stability reflects its 2.03 beta value.

Of 99 stocks in the B-rated Semiconductor & Wireless Chip industry, AMD is ranked #76, while TXN is ranked #27.

Beyond what we’ve stated above, our POWR Ratings system has also rated both AMD and TXN for Growth, Momentum, Sentiment, and Value.

Get all AMD ratings here. Also, click here to see the additional POWR Ratings for TXN.

The Winner

Growing demand from several industries should enable the semiconductor industry to grow substantially. So, both AMD and TXN should benefit in the coming months. However, higher profitability and lower valuation make TXN a better buy here.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Semiconductor & Wireless Chip industry.

Click here to checkout our Semiconductor Industry Report for 2021

TXN shares were trading at $192.01 per share on Tuesday morning, down $0.20 (-0.10%). Year-to-date, TXN has gained 18.35%, versus a 16.40% rise in the benchmark S&P 500 index during the same period.

About the Author: Sweta Vijayan

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...

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