Tech shares have been having a volatile time of late following concerns raised over the sector’s exorbitant valuations. Last Friday, The Goldman Sachs Group, Inc. (GS) issued a report regarding the top five tech majors of the year in terms of performance, which triggered off several questions about the sector’s recent gains. As a result, the Nasdaq closed 1.8% lower and also posted its worst weekly performance in a year. (Read: Rotate Out of Tech: 5 Top Rated Picks from the Year's Leading Sectors)
After a brief respite on Monday, when the Nasdaq posted its largest one-day percentage and point wise gain since Nov 7 last year, tech stocks declined the very next day. Overvaluation concerns have returned to haunt the markets, despite several analysts opining that the downturn for tech stocks is only temporary. A strong showing during the next earnings season should put the sector back on track, they feel.
Stocks Under Consideration
It’s been a terrific year for the tech sector otherwise, especially for the semiconductor space with the iShares PHLX Semiconductor (SOXX) rising 20.3% year to date. The leading gainers for the year from the sector are Advanced Micro Devices, Inc. (AMD - Free Report) , Broadcom Limited (AVGO - Free Report) and Micron (MU - Free Report) , which have gained 29.1%, 39.3% and 45.5% year to date, respectively.
In this context an analysis of two stocks from the Zacks Semiconductor – General industry, NVIDIA Corporation (NVDA - Free Report) and Texas Instruments Incorporated (TXN - Free Report) would be very pertinent. Both these stocks have a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Semiconductor – General industry has performed strongly over the last one year, increasing 45.4% versus the S&P 500’s 19.8% gain. Texas Instruments has underperformed the broader industry, increasing only 30.6% over the same period. In contrast, Nvidia has posted a whopping 246.2% increase.
The most appropriate valuation metric in case of the semiconductor industry is the Price-to-Book ratio. This ratio successfully captures the fluctuation in earnings experienced by the sector. First, it is important to consider where the industry as a whole stands from a valuation perspective. Here, we can see that with a Price-to-Book ratio of 3.53, the Semiconductor- General industry is marginally undervalued compared to the S&P 500 which has a value of 3.64.
Coming to the two chipmakers, both Nvidia and Texas Instruments are overvalued relative to their broader industry. However, Texas Instruments holds the edge here with a lower price-to-book ratio of 7.43, compared to Nvidia’s value of 15.37.
Return on Equity
This is a key metric of profitability and is utilized by investors to gauge the level of bet profit returned relative to equity held by shareholders. Here, Nvidia is clearly ahead with a return on equity level of 36.4%, which is higher than the industry’s level of 21.84%. At 34.5%, Texas Instrument’s return on equity value exceeds the industry average, but it is inferior to the one sported by Nvidia.
EBITDA margin is among the more the popular measures of a company’s operating profitability. EBITDA stands for earnings before interest, taxes, depreciation and amortization. Thus, EBITDA margin shows what percentage EBITDA makes up of total revenues. It provides investors with a good idea about both the cash flow and the operating profitability of a company.
Here, Nvidia falls behind with an EBITDA margin of 32.6%, which is lower than the industry average of 39.49%. Texas Instrument emerges as the clear winner on this count with an EBITDA margin of 44.51%.
This metric measures the ability of a company to service both short term and long term debt. In other words, it is the ratio of the current level of total assets and expresses to that of the current level of liabilities. Here, Nvidia is a clear winner with a current ratio of 8.26, which is superior to the industry average of 1.78 as well as Texas Instrument’s reading of 4.51.
Earnings History, ESP and Estimate Revisions
Considering a more comprehensive earnings history, both Texas Instruments and Nvidia have delivered positive surprises in all the prior four quarters. However, Nvidia stands out with an average earnings surprise of 27%, higher than Texas Instrument’s level of 7.7%.
When considering Earnings ESP, Texas Instruments is better placed with a value of 0.00%. Nvidia has an ESP value of -2.90%. At the same time, Nvidia’s earnings estimate for the current year has increased by 0.4% over the last 30 days, higher than Texas Instrument’s level of 0.1%.
Our comparative analysis shows that Texas Instruments holds an edge over Nvidia when considering EBITDA margin, price-to-book ratio and ESP. However, when considering price performance, return on equity, current ratio and a more comprehensive look at its previous earnings performance, Nvidia is clearly a better stock. Additionally, Nvidia’s expected earnings growth for the year is 19.8%, superior to Texas Instrument’s level of 16.9%, which is why we can conclude that of the two, Nvidia is clearly the better stock.
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