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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 17.1% in 2016 to approximately 18% by the end of our forecast period.
However, there are 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 rising 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 20% 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 will be a marginal downside to our price estimate.
- Analog gross profit margin: We forecast the gross margin on Analog products to increase from 62% in 2016 to 69% by the end of our forecast period, as the company increases its production on 300mm facilities going ahead.
However, it should be noted that there is higher pricing pressure in the semiconductor industry due to fierce 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 a more than 10% downside to our current price estimate if the gross margins decline to 55%.
- Embedded semiconductors market share: We forecast TI's market share in embedded semiconductors to increase from 16% to 18% over our forecast period. However, there could be a 20% upside in our price estimate if TI manages to improve its market share by 10% over our current estimates by the end of our forecast period.
Texas Instruments (TI) designs and manufactures semiconductors to sell to electronics designers and manufacturers all over the world. TI has two main 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 Processors, microcontrollers and connectivity products, which account for 50%, 45% and 5% of its embedded revenue, respectively.
Other businesses include smaller semiconductor operating segments that include product lines such as DLP products (primarily used in projectors to create high-definition images), custom semiconductors known as application-specific integrated circuits (ASICs), TI's handheld graphing and scientific calculators and revenues from TI's legacy wireless business.
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 over 64% to its revenues and 66% of its operating profit in 2016. TI is the market leader in analog semiconductor with a market share of 17%.
After its planned exit from the mobile market in 2014, TI is now focused on leveraging its OMAP processors and wireless connectivity solutions in a broader set of embedded applications. With new product launches, it continues to expand its embedded portfolio every quarter. TI believes that the embedded markets currently valued at $19 billion offers greater potential for sustainable growth compared to mobile devices. In the last two year, TI has expanded its product portfolio by almost 20%.
The proportion of TI’s revenues from 300mm production to go up
The proportion of TI’s revenues from 300mm production is likely to go up in the coming quarters, driving the margins higher for the company. To increase its 300mm production, the company is likely to ramp up its production from its RFAB and DMOS6 facilities, which cater to the 300mm production, and were largely under-utilized until 2015. TI’s RFAB and DMOS6 production facilities were operating at 45% and 25% of their full production capacity, respectively, in 2015. It should be noted that TI can put 2.3 times more chips on a larger 300 mm wafer as compared to a 200 mm wafer.
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 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.
Reason for Latest Price Change
Texas Instruments' debt and the number of shares outstanding have declined in Q4'16. Furthermore, we now anticipate that the company's strong foothold in the analog market is likely to help it improve its market share in both Analog and Embedded market going ahead. These factors have led to a more than 10% increase in our price estimate for TI.
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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