Factors That Will Drive Texas Instrument’s Automotive Segment Revenues

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Texas Instruments

Texas Instruments‘ (NYSE:TXN) overall revenues have grown since 2013, when the company started focusing on the Industrials and Automotive sectors. The revenues from the company’s Automotive segment have witnessed the largest uptick in revenues, as its sales have grown at a CAGR of 18% from $1.47 billion in 2013 to over $2.4 billion in 2016. That double-digit revenue growth continued in the first nine months of 2017. Furthermore, Semicast Research placed the company among the top 10 automotive semiconductor suppliers for 2016 with a market share of nearly 7%. For automotive applications, TI supplies a wide range of semiconductors for ADAS (advanced driver assistance systems), passive safety systems, electronics and lighting, as well as infotainment, drive-train control and other systems. Each of these sub-segments is expected to see strong growth going forward. In this note, we explore the factors that will continue to drive revenues for the company’s Automotive segment.

See our complete analysis for Texas Instruments

Automotive Revenue Growth Likely To Continue

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According to IHS, the automotive semiconductor market is expected to grow at a CAGR of 7.1% to reach $48 billion by 2022. Given that Texas Instruments is a leader in this industry, and its share has increased over the past few years, we believe that the division’s health revenue growth is likely to continue going forward. Some of the key factors that will drive revenue growth for TI’s automotive segment are:

1) Chip Design Longevity For The Automotive Industry Will Boost Revenues: The company has stated that its automotive-related chips and designs have long life cycles relative to those for other product lines. This means that the underlying chip architecture and design can sustain the innovation, automation and electronic requirements in the automotive industry for longer durations. As a result, the company can continue to produce and sells its chips to the automotive sector in the near foreseeable future without the threat of any disruption. Therefore, we believe that this will help the company to sustain its automotive revenues for years to come.

2) Shift to HEVs (Hybrid and Electric Vehicles): Automakers have started overcoming challenges related to cost, battery-charging and market acceptance of electric vehicles, due to which HEVs and EVs will likely experience strong demand in the future. These HEVs and EVs use a plethora of electronic standards and components.  Furthermore, these vehicles use ~2x more electronic content than a traditional vehicle according to Mckinsey. For example, the controller and charger are electronic devices that power an HEV and EV.  As a result, the demand for electronic components in these hybrid/electric vehicles is directly related to the sales these vehicles. Therefore, as more HEVs and EVs are sold, the demand for electronic chips used in these vehicles is expected to increase. This should help Texas Instruments, as it is one of the leaders in the Automotive semiconductor industry.

3) Growth Of Electronic Components in Car Interiors: According to GM Insights, the global automotive electronics market is expected to grow from over $206 billion in 2016 to $395.9 billion by 2024. With growing connectivity and increasing need for comfort and safety, electronic components such as ADAS, passive safety and infotainment are likely to see strong demand from automotive companies. Although ADAS applications are still in a relatively nascent stage, these applications are expected to be an important source of revenues for semiconductor companies such as TI. According to reports, ADAS market is likely to experience a CAGR of more than 10% to reach over $42 billion by 2021.

We currently have an $80 price estimate for Texas Instrument’s stock, which is nearly 20% below the current market price.

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