With a view that its baseband business offers less promising growth prospects, Texas Instruments (NASDAQ:TXN) no longer invests in the development of baseband products and expects revenues from this division to cease by the end of the year. However, we believe that with innovative product offerings, wireless connectivity and application processors can become the new revenue drivers for the company. We estimate the application processors and connectivity division to contribute around 18% to TI’s valuation and forecast the company to maintain its current market share for the rest of our review period.
We think with a 56% contribution to its price estimate, TI’s growing strength in the analog division will continue to be the driving force behind its dominant position in the semiconductor industry. However, as the question looms large about the company’s future in the wireless market, with the entry of relatively new rivals such as Broadcom (NASDAQ:BRCM), Nvidia (NASDAQ:NVDA) and Intel (NASDAQ:INTC), it is equally important for the investors to focus on TI’s future prospects in this segment.
TI Bets on Growing Demand for Standalone Application Processors
Unlike Qualcomm, which has been a big proponent of integrated-baseband strategy, TI bets on a big market for dedicated application processors in the high-end smartphone market. As per Strategy Analytics, stand-alone processors accounted for 44% of smartphone apps processors in Q1 2012, up from 39% in Q1 2011. 
On the other hand, baseband-integrated app processors are known to be cheaper for handset makers for use in mobile phones compared to standalone processors. The baseband-integrated application processors strategy of companies such as Broadcom and MediaTek is the prime reason why they are a threat to more established competitors such as Qualcomm (NASDAQ:QCOM), Samsung and TI.
However, going forward, if the standalone chip market fails to grow enough to justify the company’s huge investment, then TI’s long-term strategy might backfire, significantly impacting its valuation.
Alternate Use of OMAP Processors
Last year, TI came out with the OMAP4 mobile application processor. Some of the recently announced programs that are based on TI’s OMAP 4 platform include Samsung’s (SSNLF) Nexus & Galaxy SII Smartphones, Motorola’s Droid Bionic and Droid RAZR Smartphones, LG’s Thrill Smartphone, and Amazon’s Kindle Fire tablet. Additionally, TI plans to start shipping the OMAP 5 processors, which it claims is far more superior in power and performance, by early next year.
However, given that some leading smartphone manufacturers such as Samsung, which also happens to be TI’s customer, have started developing their own wireless chips could pose a possible threat for the company. Additionally, Nokia and Research In Motion, two of TI’s key customers, have been losing ground in the smartphone market, which should be a concern.
In an effort to counter increasing competition in the smartphone market, TI has started selling its OMAP processors in a few alternate markets, such as automakers in the industrial sector, to diversify its revenue base. However, though encouraging, we think that revenues from alternate markets might not suffice and that the company will have to concentrate on retaining its foothold in the smartphone market to maintain its market share in the long run.
Our price estimate of $43.48 for Texas Instruments is at a premium of over 40% to the current market price.
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- Strategy Analytics: Smartphone Applications Processor Revenue Soared 55 Percent in Q1 2012, Market Watch, August 7, 2012 [↩]