Better Buy: ARM Holdings plc or Texas Instruments Incorporated?
ARM Holdings and Texas Instruments might interest investors who are looking to add a major chipmaking stock to their portfolios. ARM licenses its low-power chip designs to a wide variety of mobile chipmakers, while Texas Instruments generates most of its revenue from sales of analog and embedded chips for mobile devices, personal electronics, cars, industrial machinery, and wireless infrastructure. Let's compare and contrast these two companies to see which is the better buy at current prices.
A Texas Instruments fab. Image Source: TI.
Top-line performanceARM generates revenue from two main sources: licensing fees from signing new chipmakers and recurring royalties from existing ones. When a new manufacturing process is introduced, licensing revenues rise faster. But when OEMs are waiting for a new process -- like the current lull before the launch of new 10nm/7nm licenses -- royalty revenues grow more rapidly. That's what happened last quarter, when licensing revenue only inched up 2% annually to $158.5 million as royalty revenues rose 31% to $217 million. Total sales rose 14.1% to $408 million, beating expectations by $10 million. Analysts currently expect ARM to grow its annual sales about 16.8% this year and 11% in 2017. Slowing sales of smartphones, which Gartner expects to rise just 7% this year, are expected to impact ARM's top-line growth.
Valuations and dividendsLooking ahead, analysts expect ARM to grow its annual earnings by 13.6% over the next five years, which gives it a 5-year PEG ratio of 2.2. TI is expected to post 10% earnings growth during that period, which gives it a PEG ratio of 2. While neither stock comes close to dropping below the "undervalued" PEG threshold of 1, TI looks slightly cheaper than ARM relative to its earnings growth potential.
The better buy: Texas InstrumentsARM is posting stronger sales and earnings growth than Texas Instruments, but TI's lower forward valuation and higher dividend make it a better buy at current prices. However, I still don't consider TI an ideal chipmaking play yet, since widespread softness in the mobile, enterprise, industrial, and wireless sectors will all likely weigh down TI's growth over the next few quarters. Other chipmakers alsooffer better dividends than TI, so income investors might want to check out those stocks first for stable dividends.
The article Better Buy: ARM Holdings plc or Texas Instruments Incorporated? originally appeared on Fool.com.
Leo Sun owns shares of Qualcomm. The Motley Fool owns shares of and recommends Qualcomm. The Motley Fool recommends Gartner. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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