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Texas Instruments & Intel: Two Top Semiconductor Stocks

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Look around and you will find semiconductors everywhere.

The Semiconductor industry serves as a driver, enabler and indicator of technological progress. Developments in this field determine the way we work, travel, communicate, entertain ourselves and respond to our environment. From the PCs we work on, the cars we drive, the phones we use, the electronic gadgets on which we watch movies, listen to music or play games, to the aeroplanes and weaponry used for transportation and protection, everything uses semiconductor devices.

Semiconductor companies will continue to change and reshape our world as the years pass. You don’t want to be left behind, so make sure you’re investing in quality semiconductor stocks.

Below, we have evaluated two semiconductor companies that have demonstrated a remarkable share price performance this year. Both companies have raked in high returns for investors so far, and have the potential to keep exceeding expectations in the days ahead.

Texas Instruments (TXN - Free Report)

Headquartered in Dallas, TX, Texas Instruments, Inc. is an original equipment manufacturer of analog, mixed signal and digital signal processing (DSP) integrated circuits. The company’s compelling product line, the differentiation in its business and lower-cost 300mm capacity should in combination drive growth.

The stock has been generating solid returns since the beginning of 2016 and has gained approximately 28% year to date. The robust performance is mainly backed by the company’s phenomenal results in back-to-back quarters. This has boosted investor confidence in the stock.

In the second quarter, the company posted earnings of 76 cents, better than our estimate of 72 cents. This followed another massive beat — 4.84% in the previous quarter — indicating that this stock is in good shape.

The company also provided encouraging guidance for the upcoming quarter. It expects revenues of between $3.34 billion and $3.62 billion (up 3.5% sequentially at the mid-point) and better than the Zacks Consensus Estimate of $3.39 billion for the next quarter. The EPS for the quarter is expected at 81–91 cents, better than the Zacks Consensus Estimate of 81 cents.

The upbeat numbers stem from strengthening auto and industrial markets, which are helping the company. TI’s significant success in certain fast-growing segments of the automotive market is expected to continue as the use of electronic content in cars (currently around $350, or 1% of average car price) is increasing by the day.

Internally, the company has always executed rather well. TI, along with chipmaker Intel remains one of the few semiconductor companies depending on internal capacity for manufacturing the bulk of its devices. Since the company usually builds out capacity well ahead of demand, it is able to make opportunistic purchases. As a result, it is able to contain capex at up to 4% of sales even while in expansion mode.

One of the biggest positives at the moment is the way the company’s margins are expanding. Despite year-over-year revenue declines in last few quarters, the company’s gross and operating margins grew. The operating margin expansion in the last three quarters was particularly impressive. Last quarter, TI’s gross margins increased 56 bps sequentially and 300 bps from the year-ago quarter. The company’s gross margin has been improving consistently as more production is shifting to its 300mm line (this results in a 40% cost benefit at the die level).

Also, Texas Instruments continues to prudently invest its R&D dollars in several high-margin, high-growth areas of the analog and embedded processing markets. This is gradually increasing its exposure to industrial and automotive markets and increasing dollar content at customers, while reducing its exposure to the volatile consumer/computing markets.

We believe that this Zacks Rank #2 (Buy) stock, with a long-term EPS growth estimate of 9.6%, will continue to rally. Many would argue that Texas Instruments with its forward P/E valuation of 23.0x compared with the industry average of 17.6x is a risky bet. We disagree because hefty valuations and increasing share prices do not necessarily imply that the stock does not have much upside potential left.

Intel (INTC - Free Report)

Intel is one of the world’s leading producers of semiconductor components and digital platforms. The company supplies the computing and communications industries with microprocessors and system building blocks that are integral to computers and other connected devices, servers, and networking and communications products. It also offers associated hardware and software products, security products, and services.

Over the last one year, its shares have gained over 34%. The impressive performance on the trading front has largely been due to back-to-back outperformance in quarterly results.

Though the overall PC market has been lacking luster, it was heartening to see Intel’s second-quarter revenues continuing to outstrip the trend. This is a tell-tale sign of the company gaining share in the emerging, connected and computing device market. The strength in these devices is offsetting decline in the core PC market.

The company’s management strategy is changing with time. Intel now prefers to focus on a product range targeting other market segments, some of which would be cloud, data center, Internet of Things (IoT) and virtual reality (VR).

Notably, during the Intel Developer Forum (IDF) 2016, Intel focused on all of these important aspects. Its focus on the virtual reality (VR) headset indicates a bet on VR capabilities being the next big thing driving chip growth for PCs. This is because since VR is a computationally intensive exercise, it will favor chip sales. 

To that end, it announced Project Alloy, a reference design for cordless headgear that merges the AR and VR worlds and runs on Microsoft’s (MSFT - Free Report) Windows Holographic OS. Alloy’s design will be open sourced sometime next year when Holographic will also be offered to all Windows PCs.

As the VR market is still nascent and has huge potential, Intel wants to bring itself to the forefront of this technological revolution, and Project Alloy could be a first-class ticket to the show.

Also, Intel announced Knights Mill to target the artificial intelligence (AI) segment. Notably, AI uses neural networks resembling the way the human brain processes information. The Xeon Phi chip, which is not a successor of the current generation Phi but a different grade, offers low-precision calculation that works well when used in a bunch to make decisions in neural networks.

Moreover, Intel’s increasing market share in the data center and cloud markets continues to be one of its biggest draws in the investment world. Intel has made advancements in this area and offers integrated solutions that will likely be competitive on a cost per watt basis. The company’s investments in FPGA (which dramatically increases performances at very low power) for acceleration and memory to reduce latency and increase speeds are helping it develop custom solutions for big players.

We continue to believe that the Intel’s momentum is unstoppable, with a long-term EPS growth estimate of 7.4%. As a result, Intel carries a Zacks Rank #2.

Moreover, the stock’s low forward P/E valuation of 14.1x compared with the industry average of 17.6x, implies that the stock has huge growth potential for days to come.

Bottom Line

These two stocks have grabbed the spotlight with striking performances on the back of solid earnings results and strong growth projections. Keeping this in mind, we believe that investing in either would yield strong returns for your portfolio in the short term.

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