Monday, October 24, 2011

Nvidia To Charge Up Your Portfolio, TI Not So Much

Texas Instruments (TXN) is famous for its calculators but when it comes to sales growth, they're spitting out negative numbers. Fortunately for investors interested in chip stocks, Nvidia (NVDA) is growing like gangbusters. Is either company a good place to put your chips?

TI is expected to report a plunge in earnings later Monday. Analysts expect 57 cents a share in EPS, down 20% from the year before. Not only that but analysts are expecting TI's revenues to drop 11% in the quarter to $3.33 billion.

What's behind the drop appears to a problem with TI's business strategy. Unlike more successful companies, TI's CEO resorted to blaming external factors for the sales decline. When TI reported its second quarter results, CEO Rich Templeton cited “mixed macroeconomic and market signals.”

And Templeton claimed that demand was weak. As he said, “We note that production at some computing and consumer manufacturers appears lukewarm even though we’re heading into the back-to-school and holiday seasons.” 

Furthermore, he argued that TI suffered from soft demand in PCs and digital televisions. The good news was that TI enjoyed sales gains in demand for its power management chips.

Of course there is no law that requires TI to continue to depend so heavily on slower growing markets. It could, instead, set its sites on faster growing markets as Nvidia does. When it reported its second quarter results, Nvidia's stock spiked 19% after executives said its revenues would rise between 4% and 6% faster in the third quarter compared to the second one.

Nvidia's second quarter guidance translated into higher-than-expected third quarter sales expectations. Specifically, Nvidia guided analysis several hundred million dollars higher to a range between $1.06 billion and $1.08 billion -- above analysts' average forecast of $1.05 billion.

Not only that, but Nvidia's earnings more than tripled in the second quarter. It reported non-GAAP earnings of $193.5 million -- 304% above the $48 it earned the year before. 

Does this mean you should shun TI and but Nvidia? You might consider both. Here's why:
TI's recent results make me wonder whether it can recover in 2012 -- if it does, the stock looks reasonably priced. But Nvidia's P/E seems to reflect investors' concerns that it may not be able to sustain its recent rapid growth. But even if its growth rate slows down in fiscal 2013, the stock still looks cheap.
  • Texas Instruments: Strong growth and margins; fairly priced stock. Despite the short term drops, TI's revenues were up a solid 34% to $14.12 billion in the past 12 months while net income was up 119% to $3.1 billion over the same period, which yielded a 22.2% net profit margin. Its PEG of 1.00 (where a PEG of 1.0 is considered fairly priced) is reasonable on a P/E of 11.76 and expected earnings growth of 11.7% to $2.51 in 2012.
  • Nvidia: Decent growth, fair margins; inexpensive stock. Revenues for Nvidia were up 6.5% to $3.7 billion in the past 12 months while net income shot up 472% to $543 million, yielding a net profit margin of 14.65%. Its PEG of 0.91 (where a PEG of 1.0 is considered fairly priced) is incredibly cheap on a P/E of 15.91 and expected earnings growth of 17.5% to $1.18 in 2012.
TI's recent performance suggests that it may not be able to resume positive earnings growth in 2012. But if the forecast is right, its stock is fairly priced. Nvidia, by contrast, is growing much faster but analysts seem to think its growth will slow down in fiscal 2013. But even if it does, the stock is cheap at its current P/E.


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