Texas Instruments - Valuation

Sunday, March 30, 2008

[Originally for Sramana Mitra's site]

I value Texas Instruments at $32 per share. As we have seen in the last few weeks, the strengths are a good management, its analog strategy, the HPA growth and manufacturing efficiency. Its weakness is the wireless business. The growth drivers do not have the ammunition yet to drive the company out of the rut caused by the wireless world. This means that the share price will continue to hover around the $30 mark for quite sometime into the future.

TI has made the conscious decision to pursue analog vigorously. This has certainly paid off, especially with HPA growing phenomenally in the last few years. The company benefits further from the higher margins from HPA which I anticipate will grow at about 15% over the next few years. In keeping with this push, TI has diverted all its manufacturing capabilities towards analog slowly migrating towards the fabless model for digital manufacturing. This move away from the Integrated Device Manufacturer (IDM) model to a more hybrid strategy has allowed TI to become more nimble.

On the other hand, TI also seems to have made a conscious choice to stay away from mainstream wireless development. As I pointed out, it appears to be a miscalculated strategy that has come back to bite it. A healthy 15% CAGR in its OMAP business will help maintain stable revenue from the wireless business as it compensates the loss in digital baseband and chipset business to its competition. The company is trying hard, however, to explain that all is not lost on the 3G side claiming that its most recent Ericsson deal’s “revenue potential is very, very significant over the course of time.” But it really appears that the company has missed the 3G bus and is trying hard to catch up with a soap-box car.

Overall, I estimate that TI will have a modest 4% growth in revenue for the next five years. The $32 valuation would not have been possible without TI’s constant push for a higher margin product portfolio, manufacturing agility and the laudable margin targets. If it can somehow transform its wireless fortunes, either through partnership deals or an accelerated development effort and complement it with regained design wins, then we may see the stock inch towards the $40 mark. In the interim however, I am going to stay away from this stock for I don’t see any promising ROI here.

Posted by Vijay Nagarajan at 7:00 PM  

2 comments:

Vijay,

I'm wondering which method you're using to put numbers on stock valuations. Your
ideas about possible product developments, ASP and margins are indeed insightful but how do you translate them to stock prices?

I found it very difficult to do this
since electronic companies do not have
a steady stream of earnings on a single
profuct unlike, say, Fedex. Thus the
difficulty to use a discounted earnings
and other common models.
I'm sure that,as an engineer, you've
got to be using some precise modeling :)

Dmitriy said...
May 15, 2008 at 5:10 AM  

Dmitriy,

Replied via email.

Vijay

Vijay Nagarajan said...
May 15, 2008 at 10:50 AM  

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