How Sensitive Is Texas Instruments’ Stock To Its Gross Margin?
Over the past few years, Texas Instruments (NYSE:TXN) has been focusing on the industrial and automotive markets, which are witnessing a significant increase in semiconductor content. The company is also extensively focusing on the 300-millimeter analog fabrication vertical as 300 mm wafers cost significantly less than an unpackaged chip built on 200-millimeter wafers. This strategy has helped Texas Instruments to improve its gross margins from under 50% in 2012 to 64.5% in Q3 2017. During this timeframe, valuation for the company has grown from $31 billion to over $117 billion. We believe that the gross margins for the company will continue to improve in 2018 as revenue contribution from the Analog vertical, which employs 300 mm fabs, grows. As a result, TI’s ability to maintain and improve its gross margin is important for its investors. We have created an interactive model that details how a change in gross margin can impact the valuation of Texas Instruments. You can modify assumptions such as projected revenue and margins to see how the dynamics of gross margin/valuation change. The image below shows one of the key steps in identifying Texas Instruments’ stock sensitivity to changes in its gross margin. We detail how a change in gross margin impacts gross profit, which then impacts EPS and subsequently the stock price (assuming P/E multiple doesn’t change).
We find that a 1% gain in TI’s gross margin would imply nearly a 3.4% upside to its market price, which we estimate using projected EPS and forward-looking P/E multiple. Our sensitivity analysis assumes that margin gains would not impact TI’s forward-looking P/E, which currently stands at 26x based on our estimates.
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