Here Is Why We Revised Our Price Estimate For Texas Instruments To $60
We recently increased our price estimate for Texas Instruments’ (NYSE:TXN) by approximately 15%, to $60. The revision in our price estimate for TI is mainly because we believe that the company will manage to have higher gross margins than we previously believed in both analog and embedded processing segments going forward. In the table below, we show the exact changes in our estimates for Texas Instruments’ gross margins:
300mm Production To Drive Down The Production Costs Lower
Earlier this year, TI pointed out in its presentation about its capital management strategy that it can achieve 68% gross margins for analog chips that were manufactured on a 300mm wafer. However, back then, it was hard to believe that despite an expected slowdown in the semiconductor industry, the company would be able to further improve its gross margins, which were already at its highest levels in 2015.
However, TI’s effective manufacturing strategy has helped it improve its gross margins by approximately 200 and 390 basis points in the analog and embedded processor segments, respectively, over the last two quarters. At 61.2%, the company’s gross margins were at its highest levels in Q2’16. This has instilled our confidence in the company’s ability to further lower its manufacturing costs going ahead. Shifting to 300mm analog production has helped TI reduce its chip costs by around 40%. This is due to the fact that TI can put 2.3 times more chips on a larger 300 mm wafer as compared to a 200 mm wafer.
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We believe that TI should continue to benefit from its strategy of shifting to high margin 300mm production. 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. This comes from the fact that in 2015, the company had about $2 billion of its Analog revenues coming in from the 300mm analog production, which translates to only 25% of its overall analog segment revenue.
To increase its 300mm production, the company is likely to ramp up its production from 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. Additionally, the company’s DMOS6 facility supports the production for its embedded processing segment, which is likely to help improve the margins for embedded processor segment.
A Downside Scenario:
We expect TI’s analog and embedded gross margins to reach 68% and 57% respectively by 2019. However, if the company fails to ramp up its output from 300mm production facilities and its gross margins for both its analog and embedded segments remain at the current levels till 2019, then there can be approximately 10% downside to our current price estimate. We invite the reader to manipulate the drivers above to verify this sensativity.
Notes:
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