VALUATION HIGHLIGHTS

1. Analog Semiconductors constitute 81% of the Trefis price estimate for Texas Instruments's stock.
2. Embedded Processors constitute 14% of the Trefis price estimate for Texas Instruments's stock.

WHAT HAS CHANGED?

Full-year 2020 Earnings

Texas Instruments reported net sales of $14.46 billion for 2020, up from $14.38 billion in 2019. TI was able to control COGS and operating expenses, which boosted operating margins to 40.8% from 39.8%, despite only marginal revenue growth. A lower tax rate meant that net profit jumped over 10% from $5.02 billion to $5.6 billion over this period, driving EPS up from $5.33 to $6.05.

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 $8.1 billion in 2014 to about $10.9 billion in 2020, driven by higher demand from the consumer electronics, automotive and industrial segments. We expect the metric to rise to about $20 billion by 2027. 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 $14 billion by 2022, it could translate into a downside of about 10% to our price estimate. On the other hand, if revenues grow more quickly to $25 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 67% in 2020 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 60%.

Embedded Revenues

• Embedded semiconductors revenues: We forecast TI's revenues from embedded semiconductors to increase to $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 $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 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 2020. TI is the market leader in the analog semiconductor space.

Embedded

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 offer greater potential for sustainable growth compared to mobile devices. In the past few years, TI has expanded its product portfolio by almost 20%.

KEY TRENDS

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 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.

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 TIs 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.