Texas Instruments’ Shift Away From Wireless Will Weigh On Its $43 Valuation

by Trefis Team
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Texas Instruments
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With a view that its baseband business offered less promising growth prospects, Texas Instruments (NASDAQ:TXN) ceased all R&D effort for cellular baseband in 2008. We at Trefis were of the view that with innovative product offerings, wireless connectivity and application processors could become the new revenue drivers for the company’s wireless division. However, earlier last month the company declared its intention to reduce efforts to further leverage the OMAP processors in the smartphones and tablets market. TI will instead divert its focus on expanding the OMAP footprint in embedded applications such as automotive, industrial, enterprise communications, vision and robotics.

We estimate the application processors and connectivity division to contribute close to 20% to TI’s valuation and believed that by tapping the growing potential in smartphones and tablets, the company was capable of stabilizing its declining share in the wireless market.

While we remain positive on the company’s long term prospects in the analog and embedded processor divisions, but we feel that steering away from the lucrative smartphone and tablet market could have a negative impact on the company’s valuation.

See our complete analysis of Texas Instruments here

TI’s Product Wins Dry-Up With Intense Competition

Growth in mobile devices is expected to be the primary driving force for the semiconductor industry, and the slated growth in this segment has led to stiff competition between the likes of TI, Qualcomm (NASDAQ:QCOM), Nvidia (NASDAQ:NVDA), Broadcom (NASDAQ:BRCM) and the relatively new entrant – Intel (NASDAQ:INTC). Additionally, TI also faces increasing threat from the in-house design of bigwigs such as Apple (NASDAQ:AAPL) and Samsung, which happens to be one of TI’s customers.

While TI had seen a rapid increase in revenues from OMAP processors in Q1 2012, winning both the application processor as well as the Wi-Fi socket in Amazon’s (NASDAQ:AMZN) Kindle Fire, the revenues slipped slightly in the subsequent quarter. Additionally, Nokia and Research In Motion, two of TI’s key customers, have been losing ground in the smartphone market.

The upcoming Kindle Fire HD is one of the recent design wins for the OMAP 4 processors. 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, the company also claims to be struggling to survive in this division amid intense competition and macroeconomic headwinds. Some of the company’s investors doubt its future outlook in the wireless business and believe that exiting the wireless market altogether should do well for TI’s future valuation.

Alternate Use of OMAP Processors

In an effort to counter increasing competition in the smartphone market, TI started selling its OMAP processors in a few alternate markets, such as automakers in the industrial sector, to diversify its revenue base. The company will now focus on promoting its OMAP processors in additional markets such as automobiles, enterprise communication, medical gear etc.

TI believes that the embedded business along with its core analog business will offer the company a steadier and more predictable growth pattern. However, we feel that while expanding in the alternate markets might be encouraging, stepping away from mobile market altogether might leave TI behind other competitors in the semiconductor market.

We think that revenues from alternate markets, at least in the short run, might not suffice to compensate for declining revenues from the application processor division.

We are in the process of updating our price estimate of $43.48 for Texas Instruments in light of the recent updates.

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