Stock Analysis & Ideas

WOLF vs. TXN: Which Semiconductor Stock is Better?

Story Highlights

Some chipmaker stocks get most of Wall Street’s attention, but this stalwart old guard, TXN, deserves a second look, while investors may want to pass on WOLF stock even though it’s more exciting. Its dividend and valuation are just two reasons investors should look at the steady-eddy Texas Instruments.

The last few years have been turbulent for chipmakers as supply-chain issues weighed on their sales and profitability. So are things any closer to turning around? In this piece, we compared two less-talked-about chipmaker stocks. Wolfspeed (NYSE: WOLF) and Texas Instruments (NASDAQ: TXN) address similar markets but are quite different. While WOLF is more exciting, TXN may be the better pick. This article will explain why.

The State of the Semiconductor Market

The last few years haven’t been good for the semiconductor industry. First, a chip shortage swept the markets, leading to vastly reduced supplies of everything from cars to smartphones. Today, the shortage continues in some corners of the market, but a glut of chips weighs on others.

As a result, many chipmaker stocks have plunged this year, including NVIDIA (NASDAQ: NVDA) and Advanced Micro Devices (NASDAQ: AMD), which are down more than 50% year-to-date despite being two of the hottest stocks on Wall Street a few years ago. However, some chipmakers are doing better than others, including Wolfspeed and Texas Instruments. Wolfspeed is down 23% year-to-date, while Texas Instruments is off 14.4% for the year.

Over the long term, the semiconductor market looks ripe for investment, just as it has for years. One estimate values the global chip market at $573.4 billion in 2022 and projects a compound annual growth rate of 12.2% through 2029, bringing it to $1.38 trillion. However, the supply-chain issues that developed during the pandemic have caused some serious hiccups.

Nonetheless, some corners of the market have improved. While Strategy Analytics estimated that global shipments of 5G smartphones would decline by as much as 150 million units this year, resulting in a glut of chips, demand in the industrial sectors is climbing.

Meanwhile, the Biden administration sought to end the U.S. chip shortage by incentivizing chipmakers to build facilities in the U.S. Texas Instruments is tapping the benefits of the CHIPs Act by building a new fabrication facility in Texas. The 25% advanced investment tax credit should boost TXN’s bottom line by reducing its effective tax rate. Wolfspeed is also building a facility to take advantage of the tax credit.

Texas Instruments (TXN)

Texas Instruments makes analog and embedded chips for the industrial, automotive, personal electronics, communications, and enterprise markets. A bullish view appears appropriate for Texas Instruments due to its steadily growing revenue and profits, healthy balance sheet, and low valuation relative to its peers. It’s also a dividend stock, which makes it appeal to dividend-growth investors.

The company’s forward (Fiscal 2022) P/E ratio of 16.6x also makes Texas Instruments look undervalued. The sector median forward P/E is 18x.

Texas Instruments smashed earnings estimates for the third quarter, reporting $2.47 per share in adjusted earnings and $5.24 billion in sales, compared to the consensus numbers of $2.39 per share and $5.14 billion. Its revenue rose 13% year-over-year, while its net income grew 18%.

However, Wall Street was unhappy with the company’s guidance — even though Texas Instruments usually guides conservatively for its fourth quarter. The company estimated its fourth-quarter revenue between $4.4 billion and $4.8 billion, with earnings between $1.83 and $2.11 per share. The consensus for the fourth quarter was $4.93 billion in sales and $2.21 per share in earnings.

With more than 100,000 customers, Texas Instruments is a stalwart member of the chipmaking sector. It’s not going anywhere soon, and it pays a decent dividend, a rarity in the technology sector. In fact, the company has been increasing its dividend annually for the last 17 years and now has a dividend yield of 3.1%. Texas Instruments also repurchased $996 million worth of its shares during the third quarter, taking advantage of its falling stock price.

Unfortunately, hedge funds and insiders have both sold shares of the company, a move that may make sense in light of the company’s warning about a glut in some of its end markets. Manufacturers and retailers of personal electronics are sitting on a massive supply of chips due to demand reduced by inflation. On the earnings call, Texas Instruments warned that order cancelations had increased during the third quarter. However, it added that the automotive sector remains a robust market for semiconductors.

What is the Price Target for TXN Stock?

Texas Instruments has a Moderate Buy consensus rating based on 10 Buy ratings, 10 Holds, and two Sells over the last three months. At $175.67, the average price target for Texas Instruments implies upside potential of 8.9%.

Wolfspeed (WOLF)

With some analysts declaring that a 50% increase is possible for Wolfspeed due to its exposures to the electric vehicle, 5G, renewable energy & storage, and aerospace & defense markets, it’s easy to understand why investors are excited about the company. However, its lack of profitability and high valuation make a bearish rating look appropriate.

Formerly known as Cree, Wolfspeed manufactures silicon carbide-based semiconductors. The company released its earnings results for its most recently completed quarter, and it was a similar story to what happened when TXN reported.

Wolfspeed posted $241.3 million in revenue and adjusted losses of $0.04 per share, while analysts had been expecting $239.8 million in sales and losses of $0.05 per share. The disappointment came with the company’s guidance. Wolfspeed estimated adjusted losses of $0.12 per share and $225 million in revenue at their respective midpoints, compared to the consensus of $0.01 per share in losses on $252.5 million in revenue.

Despite its lack of profitability, Wolfspeed has a relatively high valuation. It trades at a P/S of around 12.8x, which is higher than both TXN’s multiple and the industry averages. With ~$3.9 billion in assets, $1.2 billion in cash and short-term investments, and $1.75 billion in liabilities, Wolfspeed’s balance sheet is solid, which is certainly good news. Another bright area is that insiders have been snapping up shares over the last three months, as have hedge funds.

What is the Price Target for WOLF Stock?

Wolfspeed has a Moderate Buy consensus rating based on 13 Buys, three Holds, and one Sell rating assigned over the last three months. At $112.69, the average price target for Wolfspeed implies upside potential of 21.2%.

Conclusion: Bullish on TXN, Bearish on WOLF for Now

While Texas Instruments may not seem as exciting as some of the other chipmakers, analysis suggests that the recent selling pressure in Texas Instruments shares was short-sighted, as this is a company with staying power, steady growth, and an increasing dividend. Meanwhile, Wolfspeed appears quite far from profitability, so it seems like now is too early for this stock.

On some level, the market knows this. It reacted much more violently to Wolfspeed’s guidance miss than it did to TXN’s miss, sending Wolfspeed shares down substantially immediately following that miss.

Disclosure

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