Except for 2010, Texas Instruments (NASDAQ:TXN) revenues have steadily declined in the last few years. However, the company once again featured among the the top five semiconductor vendors in terms of revenue in 2011, despite intense competition from heavyweights such as Qualcomm (NASDAQ:QCOM), Broadcomm (NASDAQ:BRCM), Nvidia (NASDAQ:NVDA) and Intel (NASDAQ:INTC). 
TI’s stock has registered a close to 15% decline since the start of the year, hitting a low of $26.43 in July 2012. However, we believe that the company could have possibly bottomed out in 2011 and should see marginal growth this year onwards. We assign a price estimate of $43 to TI, marking our valuation at a premium of almost 50% to the current market price.
Here, we list down certain factors behind our positive outlook for Texas Instruments.
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Analog Division To Be The Driving Force For TI’s Valuation
Historically, TI has been the market leader in analog semiconductors and we estimate the division to contribute close to 56% to the company’s valuation. TI also remains the market leader in voltage regulators, which contribute around 29% to its analog division revenue. According to iSuppli, voltage regulators are set to grow at an annual rate of 16%, compared to the overall analog segment’s rate of 6.3%.  We feel that TI has the ability to leverage this growth rate.
Additionally, the acquisition of National Semiconductor, which was the 7th largest analog company with a 4% market share, has enhanced TI’s product portfolio which could further increase its market share in the future. National’s strength is power management, amplifiers, and interface chips nicely fit in to complement TI’s existing portfolio of high-performance analog products.
We forecast TI to retain its dominant position and estimate a slight increase in its market share by the end of our forecast period.
Incremental Revenue Generating Capacity
Texas Instrument has added around $7 billion worth of incremental revenue generating capacity in the last few years, with the acquisition of National Semiconductor and some other companies’ fabrications and equipment and factories. Amid a slowdown in the semiconductor industry, the additional manufacturing capacity has led to lower factory utilization which in turn has put downward pressure on gross margins. Barring a sudden jump in 2010, TI’s gross margin have witnessed a y-o-y decrease from 2007 to 2011.
However, as the global economy stabilizes, we expect to see a revival in demand in the semiconductor industry next year onwards. We feel that the growth in demand would give TI an opportunity to leverage the additional capacity, consequently increasing its factory utilization rates which in turn will pull up the gross margins. Based on this assumption, we estimate the gross margins to reach around 52% by the end of our forecast period.
Research firm IDC expects global semiconductor revenue, which increased by 3.7% year over year to $301 billion in 2011, to have bottomed out in the first half of 2012 and forecasts the same to grow between 6-7% in the current year. 
Potential Risk: If the growth in the chip market does not pick up as expected, the increased costs associated with the incremental capacity could come back to bite TI, as it will negatively affect margins in the long run. If the margins stay at a level of 52% till the end of our forecast period, we could see a little over 4% decline in our price estimate.
OMAP Processors & Connectivity Solutions Could Save TI’s Declining Share In The Wireless Market
With a view that its baseband business offers less promising growth prospects, TI no longer invests in the development of baseband products and expects revenues from this division to cease by the end of the year. The company ceased all its R&D efforts in the baseband business and as a result has registered a continuous decline in its wireless products market share.
However, we believe that with innovative product offerings, wireless connectivity and application processors can become the new revenue drivers for the company. TI has been focusing on developing its application processor and connectivity business and is betting big on the increasing demand for standalone processors in the growing smartphone market.
Last year, TI came out with its new line of OMAP4 mobile application processor and also introduced the WiLink 8 which integrates five wireless technologies onto a single chip. Recently announced programs that are based on TI’s OMAP 4 platform include Amazon’s Kindle Fire 1 and upcoming Kindle Fire 2 tablet, Samsung’s Nexus & Galaxy SII Smartphones, Motorola’s Droid Bionic and Droid RAZR Smartphones and LG’s Thrill Smartphone.
At a recent press conference, Amazon’s (NASDAQ:AMZN) Chief Executive declared that the company feels that the OMAP chip has better bandwidth and computing power than Nvidia’s top mobile component.  Additionally, the company has started selling its OMAP processors in a few alternate markets in an effort to counter increasing competition in the smartphone arena.
Potential Risk: The application processor market is crowded with established players such as Qualcomm and relatively new entrants such as Broadcom, Nvidia and Intel. With its exit from the baseband market, many of TI’s investors have expressed their doubts about the potential of the company’s wireless business. Nokia and Research In Motion, two of TI’s key customers, have been losing ground in the smartphone market, which has put an additional pressure on the company. If the OMAP application fails to stay its ground in the stiff competition, there could be a significant downside to our valuations for the company.
Our price estimate of $43.48 for Texas Instruments is at a premium of just under 50% to the current market price.Notes:
- Worldwide Semiconductor Revenue Reached $307 Billion in 2011, Gartner Press Release, April 17, 2012 [↩]
- Voltage Regulators Set to Grow to $16.3 Billion by 2015, iSuppli, July 4, 2011 [↩]
- Worldwide Semiconductor Market Grew 3.7% in 2011 to $301 Billion – IDC Expects 6-7% Revenue Growth in 2012, IDC Press Release, April 30, 2012 [↩]
- Nvidia’s miss in Kindle Fire surprises some investors, Reuters, September 7, 2012 [↩]