Better Buy for 2022: Analog Devices vs. Texas Instruments

Texas Instruments Incorporated (TXN) in Dallas, Tex., designs, manufactures and sells semiconductors to electronics designers and manufacturers worldwide. It operates in two segments: Analog and Embedded Processing. In comparison,  Norwood, Mass.-based Analog Devices, Inc. (ADI) designs, manufactures, tests and markets integrated circuits, software, and subsystems that leverage analog, mixed-signal, and digital signal processing technologies.

As the demand for consumer electronics to stay connected remotely amid the COVID-19 pandemic has increased worldwide, the demand for semiconductor chips needed to run these gadgets has also risen. This, along with rising demand for semiconductors from the booming EV industry, has created a massive supply-demand imbalance. The resultant increase in prices has been favorable for chip manufacturers. And while semiconductor manufacturers are ramping up production with government support to meet the mounting demand, the supply shortage may not end anytime soon. With the growing applicability of chips in the tech era, exemplified by the Internet of things (IoT), Artificial intelligence (AI), 5G networks, and cloud computing, the demand for chips should keep rising. According to a report from trade credit insurer Euler Hermes, semiconductor sales are expected to grow by 9% in 2022. Therefore, both TXN and ADI should benefit.

ADI stock has gained 9.7% over the past year, while TXN has returned 7.8%. Also, ADI’s 3.4% gains over the past three months compare to TXN’s negative returns. Furthermore, ADI is the clear winner with 7.7% gains versus TXN’s negative returns in terms of the past nine months’ performance.

Click here to checkout our Semiconductor Industry Report for 2022

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On Jan. 11, 2022, TXN announced an expansion of its automotive offerings that can help automakers improve how advanced driver assistance systems sense objects. Its new high-resolution 77-GHz AWR2944 radar sensor detects objects up to 40% further away from the vehicle. This could lead to increasing demand for its solutions.

On Dec. 9, 2021, ADI announced a breakthrough RadioVerse System-on-Chip series that provides radio unit developers with an agile and cost-effective platform to create the most energy-efficient 5G RUs in the industry. The ADRV9040 is the first in the new RadioVerse SoC series. This could lead to increasing demand for its solutions.

Recent Financial Results

TXN’s revenue increased 22% year-over-year to $4.64 billion for its fiscal third quarter, ended Sept. 30, 2021. The company’s operating profit grew 43% year-over-year to $2.31 billion. Also, its EPS was$2.07, up 43% year-over-year.

ADI’s revenue has increased 53% year-over-year to $2.34 billion for its fiscal fourth quarter, ended Oct. 30, 2021. The company’s adjusted operating income grew 59% year-over-year to $1.01 billion. Also, its adjusted EPS was $1.73, up 20% year-over-year.

Past and Expected Financial Performance

TXN’s revenue and EBITDA have grown at CAGRs of 3.6% and 5.8%, respectively, over the past three years. Analysts expect TXN’s revenue to increase 1.7% for the quarter ending March 31, 2022, and 4.4% next year. The company’s EPS is expected to grow 1.6% for the quarter ending March 31, 2022, and 3.8% next year. And its EPS is expected to grow at a 10% rate per annum over the next five years.

In comparison, ADI’s revenue and EBITDA have grown at CAGRs of 5.5% and 1.1%, respectively, over the past three years. The company’s revenue is expected to increase 59.2% for the quarter ending April 30, 2022, and 6.6% next year. Its EPS is expected to grow 18.8% for the quarter ending April 30, 2022, and 12.7% next year. Also, ADI’s EPS is expected to grow at a 14.8% rate per annum over the next five years.

Profitability

TXN’s trailing-12-month revenue is 2.40 times what ADI generates. TXN is also more profitable, with gross profit and net income margins of 66.36% and 41.61%, respectively, compared to ADI’s 61.83% and 19%.

Furthermore, TXN’s 71.49%, 24.93%, and 29.54% respective ROE, ROA, and ROTC are higher than ADI’s 5.56%, 3%, and 3.53%.

Valuation

In terms of forward non-GAAP P/E, ADI is currently trading at 22.93x, which is higher than TXN’s 22.88x. However, TXN’s 17.44 forward EV/EBITDA ratio  is higher than ADI’s 16.84x.

POWR Ratings

TXN has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. In comparison, ADI has an overall C rating, which translates to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

TXN has a grade of A for Quality. This is justified given TXN's 31.45% trailing-12-month ROTA, which is 769.5% higher than the 3.62% industry average. In comparison, ADI has a Quality grade of C, which is in sync with its 2.66% trailing-12-month ROTA, which is 26.5% lower than the 3.62% industry average.

Of the 100 stocks in the A-rated Semiconductor & Wireless Chip industry, TXN is ranked #49. In comparison, ADI is ranked #68.

Beyond what I have stated above, we have also rated the stocks for Value, Momentum, Growth, Stability, and Sentiment. Click here to view all the TXN ratings. Also, get all the ADI ratings here.

The Winner

The semiconductor industry is expected to grow robustly with the rising demand for advanced technological solutions. While both TXN and ADI are expected to gain, we think it is better to bet on TXN now because of its higher profitability.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Semiconductor & Wireless Chip industry here.

Click here to checkout our Semiconductor Industry Report for 2022

TXN shares were trading at $185.78 per share on Wednesday afternoon, up $1.14 (+0.62%). Year-to-date, TXN has declined -1.43%, versus a -0.88% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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