Texas Instruments (NASDAQ: TXN) and Intel (NASDAQ: INTC) reported earnings within two days of each other in July. Both companies beat expectations on both the top and the bottom lines, yet both stocks dropped sharply after earnings and are struggling to get back to their pre-earnings price.
Still, even with the dip TXN stock is up 17% for the year, in line with the S&P 500. By contrast, at one point this year, INTC stock was up 37% but it’s now lagging the broader market while holding a gain of 8%.
Semiconductor stocks are becoming bellwether stocks of the ongoing digital revolution. And while they may not garner the headlines of other chipmakers, Intel and Texas Instruments are frequently analyzed together for investors looking for value stocks.
That being said is either stock a better value at the moment? It may be as simple as understanding supply and demand.
One cautionary note in an otherwise positive earnings season is how the ongoing supply chain weakness is impacting forward guidance. And no sector better embodies this weakness than semiconductors. The sectors that are expected to drive our economy forward in the next several decades (electric vehicles, artificial intelligence, the internet of things) all depend on semiconductor chips.
Why Are the Stocks Dropping?
Texas Instruments lowered its forecast for both earnings and revenue for the third quarter. If true, that would indicate slowing growth.
However, this may be a case of a company managing expectations. Texas Instruments generates a significant amount of its revenue from three segments: industrial, automotive and personal electronics. The key segment right now appears to be automotive. Texas Instruments doesn’t break out those sales specifically, but that sector has broadly lifted the entire chip sector. If demand is weakening, that would be a bearish signal for TXN stock.
For Intel, the story is a bit more complicated. In fact, Intel has said it forecasts the global chip shortage to last into 2023. However, analysts are taking a bearish view on Inte’s ability to deliver the goods. Specifically, the company continues to lose market share to Advanced Micro Devices (NASDAQ:AMD). And the company’s recently announced plan to regain its leadership in the semiconductor segment is being met with skepticism by industry analysts.
Plus, Intel was looking attractive earlier this year as analysts were expressing concern about AMD stock’s valuation. Those concerns are melting away as AMD stock continues to post strong earnings. I
Which Stock is the Better Buy?
According to analysts, INTL stock has a possible upside of over 11%. TXN stock on the other hand has an upside of just over 6%.
Investors should consider which stock is more likely to hit its target. At this point, Texas Instruments seems only limited by potential, but seemingly unlikely, decrease in demand. Intel faces what appears to be a structural problem in bringing its chips to market.
Simply put, many analysts believe Intel must prove itself first. And that’s reflected in the fact that 11 out of 35 analysts give the stock a Sell rating.
There’s also the dividend to consider. Texas Instruments has an annual dividend of $4.08 which is up 9.7% from the prior year. The company has a three-year payout ratio of over 75%. By contrast, Intel has an annual dividend of $1,39 and has a three-year payout ratio of over 22%.
In my mind, there are fewer questions surrounding Texas Instruments. And with demand likely to remain strong, and a richer dividend, this would be the one I would choose if I’m seeking value.
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