VALUATION HIGHLIGHTS

1. Analog Semiconductors constitute 77% of the Trefis price estimate for Texas Instruments's stock.
2. Embedded Processors constitute 17% of the Trefis price estimate for Texas Instruments's stock.

WHAT HAS CHANGED?

Q4 FY 2023 Earnings

Texas Instruments reported a weak set of Q4 2023 results, with net sales standing at $4.08 billion, down 13% year-over-year, amid weaker sales of analog semiconductor products. Earnings came in at $1.49 per share. For Q1 2024, the company expects revenue in the range of $3.45 billion to $3.75 billion and earnings per share of $0.96 to $1.16.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

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 Revenues

• Analog semiconductors revenues : TI's Analog revenues have grown from $11 billion in 2018 to about $15.4 billion in 2022, driven by higher demand from the consumer electronics, automotive, and industrial segments. We expect the metric to rise to over $20 billion by 2029. However, the 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's revenues only grow to about $19 billion by 2029, it could translate into a downside of about 10% to our price estimate. On the other hand, if revenues grow more quickly to $30 billion, it could increase our price estimate by about 15%.


• Analog gross profit margin: We forecast the gross margin on Analog products to increase from 71.3% in 2022 to 72% 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 65%.

Embedded Revenues

• Embedded semiconductors revenues: We forecast TI's revenues from embedded semiconductors to increase to almost $4.5 billion over our forecast period. However, there could be a 20% upside in our price estimate if TI's revenues from semiconductor were to improve to almost $8 billion by the end of our forecast period.

BUSINESS SUMMARY

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:

1. Analog

Analog consists of high volume analog & logic, high-performance analog, and power management products.

2. Embedded Processing

Embedded Processing consists of Processors, micro- controllers, and connectivity products, which account for 50%, 45% and 5% of its embedded revenue, respectively.

3. Others

Other businesses include smaller semiconductor operating segments that include product lines such as DLP (Digital Light Processing) 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 include 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.

SOURCES OF VALUE

Analog

The Analog segment continues to be the most valuable segment for TI, accounting for about 75% of its revenues in 2022. TI is the market leader in the analog semiconductor space.

KEY TRENDS

Analog Business benefits from emerging trends

TI's analog business could benefit from emerging technology trends such as 5G and connected automobiles. The ongoing commercial deployment of 5G networks in Western markets could drive demand for TI's Power ICs and related products. The company could also benefit from increasing semiconductor content in automobiles.

Lower 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.

The proportion of TI's revenues from 300mm production to go up

Texas Instruments has been steadily ramping up its production of 300 mm wafers for its analog processors, as it looks to cut costs and boost production efficiency. TI can put 2.3x more chips on a larger 300 mm wafer as compared to a 200 mm wafer and notes that output from a 300 mm fab is 40% less expensive than chips produced using the 200 mm process. TI has two fabs, called RFAB and DMO56, which produce 300mm wafers and the company will build out another 300 mm fab in Richardson, Texas. As of 2020, about 75% of the company's analog production came from 300 mm chips and we expect that margins could rise as this mix goes up.