The largest analog chip manufacturer in the world, Texas Instruments, is a major supplier of embedded and analog chips for a range of applications, such as automobiles, industrial machinery, and personal electronics. In the upcoming years, the company's emphasis on higher-margin semiconductors and astute manufacturing-related operational decisions should produce strong free cash flow. The market for the fragmented analog chips that transform analog signals into digital signals is dominated by Texas Instruments. The business gains from intangible assets related to customer switching costs and proprietary designs. High-quality manufacturers are able to sustain healthy pricing and strong profitability over time because high-quality analog chips are not very costly or require advanced manufacturing techniques.Due to its size, Texas Instruments is able to compete in a wider range of industries without being restricted to a particular client or end market. Strong gross margin growth has resulted from the company's focus on cutting-edge 300-millimeter silicon wafers, and future growth is anticipated to be healthy. Additionally, the company's chips are essential parts of new electronics devices that improve processing power and connectivity, taking advantage of the "Internet of Things."
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Investment Upsides
Prominent broad-based chipmakers with an emphasis on mixed signal, analog, and microcontroller semiconductors have advantageous traits that support economic moats. The focus on digital chip advancements makes it hard to find engineering talent, and it takes years to teach aspiring analog engineers the nuances of chip designs. Because of this, startups find it challenging to match the years of analog expertise that incumbents possess.
Defects as low as one part per million are acceptable in some end markets, such as the automotive sector. Because broad-based semiconductors, such as analog and MCU components, only make up a small percentage of a product's bill of materials, buyers typically base their decisions more on performance than cost, which helps businesses maintain their pricing power. In order to save money on a piece of equipment that costs tens of thousands of dollars, customers in the automotive, industrial, and communications infrastructure sectors are unlikely to select a subpar analog chip or MCU. Automotive and industrial companies stopped production during the global chip shortage in 2021 and 2022 until their main chip suppliers could deliver the right, dependable, well-tested, and well-designed parts to their customers. During the shortage, this did not lead to any significant loss of market share. Broad-based chips are cutting-edge devices that don't need to make the large investments that digital processors do in order to advance along Moore's Law. They make money by investing less in capital expenditures and continuing research and development, which helps shareholders receive healthy returns on their capital. Analog semi buyers usually expect dependable products that provide the required precision and accuracy in signal processing or power management.
About 25% of Texas Instruments' and its rivals' total revenue comes from end markets with lengthy product life cycles, like personal electronics like PCs, tablets, and smartphones. However, the company is less confident in outsized economic profits from chipmakers serving the PC and handset industries due to its short product life cycles, fierce competition, and customer concentration. Texas Instruments has a dominant market share in the analog chip industry thanks to its extensive sales force and field applications engineers, which enable it to reach a wider range of customers. The business makes enough money to support its sizable sales force, which expands its consumer base and boosts chip sales, starting a positive feedback loop.
Intrinsic Valuation
Texas Instruments Inc: The Dividend
Texas Instruments (TI) has a 2025 free cash flow yield of 1.5%, an adjusted price/earnings ratio of 34 times and 25 times, respectively with a target share price of $147.06. Revenue growth resumed in 2021 and 2022, reaching over $20 billion in annual sales by the end of 2022, despite poor 2019 and 2020 due to COVID-19 and US-China trade tensions. These prosperous periods were cut short, though, by a 12.5% drop in revenue in 2023 and an 11% drop in 2024. Demand is predicted to cyclically recover for the company, growing by 9% in 2025, 13% in 2026, and 12% in 2027, bringing TI's revenue to $21.6 billion in 2027. It is anticipated that the company's core analog and embedded chip businesses will expand at an average annual rate of roughly 8%, with 9% growth in these areas as a result of growing chip content in the automotive and industrial sectors. Over the last ten years, gross margins have increased, rising from 52% in 2013 to 69% in 2022. Additionally, operating margins have leveled off, reaching a flat 35% in 2025. Long-term projections indicate that TI will rise to 48% in 2029 and mid-40% in 2027.
Investment Downsides
The cyclical chip industry, unstable end markets like PCs and smartphones, and trade tensions between the US and China pose serious risks for Texas Instruments. The business's recent decision to purchase manufacturing equipment for extremely low prices, which allowed the gross margin to increase, might result in increased expenses and possible challenges in filling factories. Because of the market's fragmentation and reliance on proprietary designs, changes in market share occur gradually. Furthermore, the company's overall top-line growth may be impacted by the likely decline in revenue from other products, like calculators. The lack of seasoned analog talent in the sector poses a serious risk, and ESG issues are unpredictable.Texas Instruments, on the other hand, has a track record of innovation and internal development of analog engineers, which could help reduce these risks. Finding inexpensive equipment and keeping a competitive edge in the market are key to the company's future growth.
Portfolio Management
With a strong balance sheet, outstanding investments, and alluring shareholder distribution policies, Texas Instruments is a well-managed company. Haviv Ilan became the company's CEO in April 2023, and the leadership change is seen as a logical succession plan. With leverage at favorable interest rates to support capital distributions to shareholders, TI maintains a healthy balance sheet. A substantial increase in gross margin has been made possible by the company's investments in 300-millimeter wafer production ten years ago. Some of TI's shareholder-friendly initiatives include updating its capital-allocation strategy for investors.By increasing the dividend to $1.36 per quarter, the management team has concentrated on giving shareholders their money back. Between 2012 and 2023, TI repurchased more than $2 billion worth of stock annually on average. The company wants to generate free cash flow from 25% to 35% of its revenue and give all of that cash flow to shareholders. If interest rates are lower than inflation or the company's dividend yield, Texas Instruments may use the debt markets to fund these initiatives.
