Apple (NASDAQ: AAPL) suppliers Invensense (NYSE: INVN) and Texas Instruments (NASDAQ: TXN) have gone in completely opposite directions over the past 12 months. Invensense, which makes motion sensors for the iPhone and other devices, lost nearly 50% of its market value. Texas Instruments, which produces IC chips, display drivers, and other components for iOS devices, rallied more than 40%.
Why did these two chipmakers have such wildly diverging fortunes? Let's examine their core businesses, growth trajectories, and valuations to find out.
How do Invensense and Texas Instruments make money?
Invensense sells most of its sensors to two customers -- Apple and Samsung . In fiscal 2016, 40% of its revenue came from Apple and 16% came from Samsung. This means that the ongoing decline in iPhone and iPad shipments hurts its core business, while sluggish sales of smartphones and tablets worldwide exacerbate that pain.
For the current quarter, TI expects its revenue to rise just over 1% at the midpoint of its guidance, and for its earnings per share to rise 7% to 20%. Analysts believe that TI's sales will stay roughly flat for the full year, but its earnings (boosted by buybacks) will rise about 8.5%.
Shareholder value and valuations
Invensense doesn't repurchase any stock or pay a dividend due to its weak cash flow and lack of profitability. Texas Instruments, however, usually tries to pay back 100% of its free cash flow (which rose 7% annually last quarter) to its shareholders via buybacks and dividends. TI has reduced its share count by 41% since 2004, raised its dividend annually for 12 consecutive years, and currently pays a forward annual yield of 2.1%.
TI currently trades at 24 times earnings, which is slightly higher than the industry average of 22 for the broad line semiconductor industry. Analysts currently expect TI to grow its annual earnings at about 10% over the next five years, which gives it a 5-year PEG ratio of 2.3.
Invensense is no longer profitable, so its trailing P/E has turned negative. However, analysts believe that the chipmaker's earnings could rise 20% per year over the next five years. Even if it hits that target (which could be tough considering the current headwinds), it would still end up with a higher PEG ratio of 2.9 -- meaning that it's still pricier relative to its earnings growth potential than TI.
The winner: Texas Instruments
The choice between Invensense and TI is an easy one. Invensense is a top-heavy supplier which is highly dependent on a single customer. To make matters worse, that customer could eventually dump it if bigger rivals like STMicro offer better prices. TI is a well-diversified chipmaker with steady growth, a decent valuation, and a solid record of buybacks and dividends -- which all make it a much better buy in my book.
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Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple and InvenSense. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. 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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