Winning both the application processor as well as the Wi-Fi socket in Amazon’s (NASDAQ:AMZN) Kindle Fire launched in November last year, Texas Instruments (NASDAQ:TXN) received a significant push in revenue from its wireless segment. Amazon’s low cost Kindle Fire is now the second highest sold tablet after Apple’s iPad. The retailer claims that it has captured close to 22% of the US tablet market over the 9 months period since the launch of Kindle Fire. 
Recently, the web is abuzz with rumors that Amazon will be releasing the Kindle Fire 2 during its September 6 press event and that the new product will feature Nvidia’s (NASDAQ:NVDA) Tegra 3 quad-core processor.  With a number of product wins, TI’s OMAP processors have been faring well so far. However, lately some of the company’s investors have expressed their doubts about the company’s wireless business, even suggesting that exiting the wireless market altogether should do well for TI’s valuation. 
If Amazon switches over to Nvidia for the new Kindle Fire, it could add another serious blow to TI’s wireless business. The application processors and connectivity solutions division contributes close to 18% to our price estimate of $43.48 for TI. We believe that the innovative product offering in the wireless segment could help TI retain the 7% market share till the end of our forecast period. However, there could be a significant downside to our price estimate if the company is unable to sustain its market share till the end of our review period.
Declining Market Share in Wireless Products
With its exit from the baseband market, TI has been witnessing a continuous decline in its wireless products market share. Ceasing all R&D efforts in the baseband business, the company has been focusing on developing its application processor and connectivity business. Apart from betting big on the increasing demand for standalone processors in the growing smartphone market, TI has started selling its OMAP processors in a few alternate markets in an effort to counter increasing competition in the smartphone arena. (Read Related Article: Could OMAP Processors & Connectivity Solutions Save TI’s Market Share In Wireless?)
However, we believe that the additional revenues from alternate markets, though encouraging, might not suffice to counter TI’s declining market share in the wireless segment. Nokia and Research In Motion, two of TI’s key customers, have been losing ground in the smartphone market. Kindle Fire was a big win for TI and being a part of the upcoming Kindle Fire 2 could have given a much needed boost to TI’s wireless business.
If TI’s market share in wireless products drops down to 3% by the end of our forecast period, there will be a 10% downside to our price estimate. However, even after accounting for a possible downfall, the company’s valuation remains at a significant premium to the current market price. We believe that the growing strength in its analog division will continue to be the driving force behind TI’s dominant position in the semiconductor industry.
Our price estimate of $43.48 for Texas Instruments is at a premium of just under 50% to the current market price.Notes:
- Amazon Kindle Fire sold out as new model expected, Hindustan Times, September 3, 2012 [↩]
- Amazon Kindle Fire 2 release date, news and rumours, Tech Radar, August 24, 2012 [↩]
- Analysis: Texas Instruments investors want wireless pull back, Reuters, August 13, 2013 [↩]