We think that Texas Instruments Incorporated (NASDAQ:TXN) currently is a better pick compared to Intel (NASDAQ:INTC). TI stock trades at about 11x trailing revenues, compared to around 3x for Intel. Does this gap in the companies’ valuations make sense? We believe so. While both the companies have benefited in the pandemic, with an overall increase in demand for their products, Intel has struggled due to delays in its next-generation chipsets, combined with gradually losing Apple as a client (Apple has shifted to in-house chipsets for their laptops). On the other hand, Texas Instruments has seen strong revenue and EBIT growth, which reflects in its surging valuation multiples. TI’s revenues have jumped from $14.4 billion in FY’19 to $16.8 billion on an LTM basis. Operating margins have risen strongly from 39.8% to 45.2% over this period. Meanwhile, Intel has seen revenue rise from $72 billion in FY ’19 to $77.6 billion on an LTM basis, with EBIT margins, in fact, dropping from 32.8% to 29.1% over this period. However, there is more to the comparison, which makes TI a better bet than Intel at these valuations. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating income and operating margin growth. Our dashboard Texas Instruments vs Intel: Industry Peers; Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.
1. Texas Instruments Is The Clear Winner On Revenue Growth
Texas Instruments had a hard time in FY 2019, amidst the semiconductor supply glut, with revenue dropping to $14.4 billion from $15.8 billion in FY 2018. Back then, Intel saw its revenues rise from $70.8 billion in FY ’18 to $72 billion in FY ’19. However, Intel has had a tough time since then, amidst delays in its next generation processors and gradually losing Apple as a customer. Since FY 2019, Intel’s revenues have risen from $72 billion to $77.6 billion on an LTM basis, a growth of 7.8%. On the other hand, TI’s revenues rose from $14.4 billion to $16.8 billion over the same period, a rise of 19%.
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While Intel is a larger company, with almost 5x the revenue of that of Texas Instruments, TI’s significantly stronger revenue growth makes it a better bet.
2. Texas Instruments The Winner Again On Margins
TI’s EBIT margins rose from 39.8% in FY 2019 to 45.2% on an LTM basis. In comparison, Intel has seen its margins drop, going from 32.8% in FY 2019 to 29.1% over the last four quarters. While the dent in Intel’s revenues has dripped down to its margins, TI’s cost-cutting initiatives have been paying off, leading to consistent EBIT margin growth in line with the jump in revenues.
3. Texas Instruments In A Better Net Cash Position
TI’s debt-to-equity ratio currently stands at 3.5%, almost one-fifth that of Intel’s 16.3%. Further, TI has a better cash cushion, with cash as a % of assets standing at 35.9%, significantly higher than Intel’s 5.3%. We believe that TI is at a significantly lower financial risk as compared to Intel.
The Net of It All
While Intel’s revenues are much larger than that of TI, the latter has seen stellar growth in revenues and operating margins compared to Intel. Looking at the post-Covid recovery, TI has fared far better than Intel, with LTM revenues more than 19% higher than the pre-Covid fiscal year (FY 2019), while Intel’s LTM revenues stand only around 8% higher than those in FY 2019. While TI has a significantly higher P/EBIT ratio of 24x vs Intel’s 10x, and a higher P/S ratio at 11x vs Intel’s 3x, TI has the potential to continue on its run, supported by strong financials. We think this gap in valuation could further widen over time. As such, we believe that Texas Instruments is currently a better buying opportunity compared to Intel stock.