Who Is King Of Boring Chips? Texas Instruments Vs. Analog Devices

Texas Instruments (NASDAQ:TXN) and Analog Devices (NASDAQ:Analog Devices) are two leading companies in the semiconductor industry known for their expertise in the design and manufacture of analog and mixed-signal integrated circuits.Both companies offer a wide range of products Applications range from consumer electronics to industrial and automotive systems. This article highlights and compares the portfolios, manufacturing, and fundamentals of TI and Analog Devices to help you understand the similarities and differences between the two companies.

This article primarily refers to Texas Instruments as TI.

Analog – an overlooked market

When people talk about semiconductors, the first thing that most often comes to mind is the big, expensive, state-of-the-art digital chips used to power the brains of computers and smartphones. Nvidia (NVDA), Intel (INTC) and AMD (AMD) is often Acting was the first to make a name for itself in this fast-paced and exciting industry. Investors, on the other hand, often ignore subsectors hidden in electronic devices without logos.When was the last time you saw a “Texas Instruments Inside” sticker on a new laptop? in a recent articlebut let’s briefly summarize it:

Analog chips can be thought of as sensory organs for digital chips. For a self-driving car to navigate the road properly, it must first receive input from sensors regarding speed, surroundings, and other external factors. All of these cannot be collected with a digital chip. This means analog chips must keep up with the growth of digital chips. Due to structural differences, these chip designs have short lifespans and Moore’s Law does not apply. This means there is no arms race for the smallest node and fabs are often used for decades. This limited capital intensity makes it a strong candidate for a shareholder-friendly capital return policy. Let’s compare these analog market leaders.

Attractive end market

Although the analog industry may seem ‘boring’, there are parts of it that have sizable growth rates. ASML’s (ASML) At its latest investor day, the company said its mature node is one of the drivers for investment in wafer capacity.Based on 300mm wafers (many analog industries still use 200mm wafer capacity ), while wafers for mature nodes are expected to grow at a 6% CAGR, well below the 12% CAGR of digital chips, but faster than demand for NAND and DRAM (slide 19). The company also sees accelerated growth in mature nodes, especially analog (see chart below).

Let’s take a look at the portfolios of both companies.

	Expected CAGR in 2030	% of TI revenue	ADI % of Revenue
industrial	12%	41%	50%
car	14%	twenty one%	twenty one%
Personal Electronics/Consumer	3-9%	twenty four%	14%
communication equipment	~7% (midpoint between smartphone and wireless)	6%	15%
Enterprise system	no data found	6%	0%

click to enlarge

Below is another excerpt from ASML’s Investor Day showing the projected CAGR of various semiconductor end markets through 2030. It turns out that industrial and automotive, along with data centers, are the best end markets to enter. TI and Analog Devices have done an excellent job of selling businesses in the end market without investing in growth markets without significant prospects. The table above shows that Industrial and Automotive make up 62% of his TI and 71% of ADI. The remaining revenue is split between Personal Electronics, Consumer and Telecommunications equipment, which have less strong growth prospects. With excellent positioning, we can conclude that both companies are poised to reap these rewards in the years to come.

A story of two manufacturing approaches

Although the end markets for both candidates are very similar, their approaches to manufacturing and reinvestment in the business are very different. Texas Instruments focuses on internal manufacturing, currently manufacturing about 80% of its wafers in its fab. These internal wafers are 300 mm and 60% of the assembly is also internal. Over the next decade, TI aims to increase this to 90%, with 75% of the wafers being his 300mm and 85% of the assembly done in-house. Analog Devices, on the other hand, outsources much of its manufacturing to contract manufacturers such as Taiwan Semiconductor Manufacturing (TSM) or GlobalFoundries (GFS). 45% of manufacturing is done in-house, 80% of testing and 20% of assembly is done in-house. According to their investor dayThis is the big difference between the two approaches. Outsourcing makes ADI’s capital lighter and easier to use, but it also reduces its ability to optimize its business. Another difference is the customer relationship. ADI uses a variety of sales channels, while TI focuses on direct customer relationships (from just 35% revenue in 2019 to up to 64% in 2021). This will give TI better data and insights into customer demand, further improving profit margins. You can also see this in the margins. Both companies have a stellar track record of improving margins, but TI remains more profitable. Analog Devices has been plagued with acquisition-related costs pouring into its net profit margin, so that’s something to keep in mind, which leads to our next point of comparison.

Reinvestment strategy

In the chart below, we can see that historically both companies have been about equally capital intensive. This changed in 2021, when TI announced accelerated capital spending plans to double its in-house manufacturing capacity with its new 300 mm fab. This will allow the company to better manage its supply chain and make its business more efficient. Furthermore, we can see that ADI’s R&D is increasing while TI’s R&D is very stable. This can be explained by the difference in strategy. Both companies have extensive product portfolios with tens of thousands of different products, but ADI prefers custom parts for a single customer than his TI, which can sell 75% of its products to multiple customers. Emphasis on in various end markets. Finally, Analog Devices is an acquisition company and has made several large acquisitions over the years. $17 billion deal Acquired by Maxim (MXIM) in 2020. TI, on the other hand, has not acquired a full company since the aftermath of his GFC. They acquired some assets from Micron Technology (Mu) 2020.

Shared target for return on capital

Both companies are very shareholder-friendly as a result of their relatively light business models that support high profit margins. Both companies aim to return his 100% of free cash flow to shareholders. In the chart below, both companies have participated in share buybacks, paid decent dividends, and have no excessive debt. As mentioned earlier, Analog Devices spent a lot of cash on the acquisition, but also paid in stock. This is evidenced by his 68% increase in shares outstanding over the past decade, despite regular buybacks. Meanwhile, TI reduced its shares outstanding by 18% at the same time. The deal ultimately worked out for ADI given his excellent FCF per share growth over the past decade.

what price are we paying?

Both turned out to be great companies, but even the best companies need to trade at reasonable valuations to be good investments. We can see that both companies far outperform the entire semiconductor market as measured by the SOXX index. Both companies are currently trading below their historical EV/EBITDA and FCF multiples. The TI is trading above the median PE ratio, while the ADI is slightly below. This may not seem very appealing, but I believe there is too much pessimism woven into future estimates that can lead to unexpected results. . With structural tailwinds, both companies are well positioned to benefit from future demand.

crown a king

I started this comparison expecting a landslide win for Texas Instruments, a shareholder of over two years, but I was very pleasantly surprised by Analog Devices. I always knew it was a good company, but it seems like a great company. Both companies are well-positioned in attractive end markets with strong businesses and talented leadership, resulting in high-margin businesses. I haven’t been able to find a clear winner. Both companies won this competition. I personally prefer Texas Instruments’ approach to in-house manufacturing excellence, but Analog Devices has a great strategy as well. It wasn’t enough to drive me down.

I hope you find this comparison worthwhile. who do you think won? Let’s continue the discussion in the comments below.