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Investment Overview for Texas Instruments (NASDAQ:TXN)
Our forecast includes the National Semiconductor acquisition. Below are key drivers of Texas Instruments' value that present opportunities for upside or downside to the current Trefis price estimate for Texas Instruments:
- Analog semiconductors market share: We forecast TI's market share in analog semiconductors to increase from 16% in 2012 to close to 19% by the end of our forecast period.
However, there a number of factors which can cause this to change. The technology industry is highly competitive and requires high R&D investment. Moreover, there is increasing competition in the industry as companies are increasingly outsourcing manufacturing and hence lowering capital costs. Thus, if TI beats its competitors by developing superior technology, it could result in an upside in market share. There would be a 15% upside in our price estimate if the market share increases to 25% by the end of the forecast period. On the contrary, if TI fails to develop superior products and its market share remains around the current level, there would be a 10% downside in our current estimate.
- Analog gross profit margin: We forecast the gross margin on Analog products to increase from 52.3% in 2012 to 56.5% by the end of our forecast period, due to the lower cost of production from TI's Richardson fabrication facility.
There is higher pricing pressure in the semiconductor industry due to increasing competition. Because TI owns much of its manufacturing capacity, a significant portion of its costs is fixed and does not decline with reductions in customer demand or utilization of manufacturing capacity, and can adversely affect profit margins. There could be 10% downside to our current price estimate if the gross margins decline to 50%.
- Embedded semiconductors market share: We forecast TI's market share in embedded semiconductors to increase from 11% in 2012 to 12% by the end of our forecast period. However for a 1% increase(decrease) in the market share, there could a similar increase(decrease) in our current price estimate.
Texas Instruments (TI) designs and manufactures semiconductors to sell to electronics designers and manufacturers all over the world. TI has four reporting segments, which are mainly established along its major product categories:
Analog consists of high volume analog & logic, high-performance analog and power management products.
- Embedded Processing
Embedded Processing consists of digital signal processors (DSPs) and microcontrollers used in catalog, communications infrastructure and automotive applications.
Wireless consists of connectivity products, OMAP applications processors and basebands for wireless applications, including handsets.
In addition to these divisions, TI reports the results of remaining business activities in Others. Other businesses include smaller semiconductor operating segments that include product lines such as DLP products (primarily used in projectors to create high-definition images) and custom semiconductors known as application-specific integrated circuits (ASICs), as well as TI's handheld graphing and scientific calculators.
Others also includes royalties received for patented technology that is licensed to other electronics companies and revenue from transitional supply agreements entered into in connection with acquisitions and divestitures.
The Analog segment continues to be the most valuable segment for TI, contributing around 50% to its revenues and profits in 2012. TI is the market leader in analog semiconductor with a market share of more than 16%, which we expect to increase to around 19% based on its superior product offerings and expanding sales and field application staff.
TI's unique offerings in the wireless connectivity solutions, like the WiLink 8, the industry's first combo chip to combine five wireless technologies onto one SoC(WLAN/Bluetooth/GPS/FM/NFC) will help it secure more design-wins with its customers who are looking for combined solutions for their smartphone/tablet applications.
Large semiconductor manufacturers have an advantage
Large companies emerging as the biggest buyers of semiconductors tend to do business with other large companies with large versatile engineering staff.
Moreover, analog ICs with improved performance specifications — lower power consumption, greater speed and precision — are narrowing the field of competitors and garnering a higher price tag - this will help large players as they have the greater resources to invest in R&D.
Lesser dependence on foundry service vendors
In-house wafer fabrication is becoming increasingly necessary to maintain control over process variables and control production at will which is not always available from foundry service vendors with generic process technology. Having in-house facilities helps to cut down operating costs as well as production costs when there is increased demand. However, the operating costs might increase in periods of lower demand.
Within analog, voltage regulators are the fastest growing segment. The wireless combo chips is one of the fastest growing segment in the semiconductor market.
Voltage regulators will outperform other analog segments, growing at an annual rate of 11.9% from 2010 to 2015. This is in comparison with 5.8% for the analog segment as a whole. In the wireless segment, growth in combo chips(WLAN/Bluetooth/FM on a single chip) has accelerated in the smartphone and tablet platforms, led by the Apple iPhone/iPad and Android-based devices.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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