Texas Instruments - Valuation Opinions

Wednesday, May 28, 2008

For a while now, I have been detailing Texas Instruments’ [TXN] failure to capitalize optimally on the impending wireless boom. In my valuation series, I pointed out that in addition to all its analog initiatives, if TXN had managed wireless better, my valuation would have increased from $32 to finish closer to the $40 mark. Nothing has changed since. But I am tempted to comment on a couple of recent analyst reports.

Citigroup’s Glen Yeung raised his rating of TXN to BUY from HOLD. Increasing the price target on the stock from $31 to $39, he replaced Intel (INTC) with TXN in Citi’s “Top Picks Live.” His report seems to be primarily based on TXN’s delay in wireless market share loss at Nokia. This in turn relies on recent comments from Broadcom indicating a delay in its EDGE ramp-up with the Finnish handset vendor. Glen seems to think that this “increased optimism in TXN’s handset revenue opportunity” will sustain TXN longer than consensus estimates.

With due respect, I think this is a very short-sighted opinion. This does not rightly reflect TXN’s longer term position in the wireless space, its overall strategy, its growth drivers and hence the intrinsic value. Share losses getting pushed out by a quarter or two merely increases its net present value but does not warrant this dramatic shift in the target price. Besides, as I have often mentioned, Nokia’s multi-vendor sourcing and TXN’s lack of a viable baseband roadmap are clear indicators that TXN has not dealt its wireless cards as well as it could have.

I find the valuation report from Thomas Weisel Partners’ Tore Svanberg and Brian Williamson much more credible. The report takes a longer term view of TXN. Their sum-of-parts analysis and their argument that analog will be TXN’s growth driver resonates better with me than the Citi report. Though the company is the analog semiconductor leader, it only has about 13% share leaving a big portion of the $35-40 billion TAM for it to exploit. As TWP notes, the analog growth should be strategized and executed through acquisitions.

While I agree on the analog aspects of the TWP analysis, I am not as sure if decreasing wireless contribution is good or was intended. (More detailed coverage here and here.) Assuming fixed resources, it is possible that TXN has consciously let go of its wireless business in exchange for the much higher margin analog business. The high performance analog segment generates operating margins that are greater than twice the average semiconductor industry margins. But does this warrant throwing away its leadership position in wireless? Couldn’t the company have pursued both businesses actively?

In summary, analog, and not wireless, will be TXN’s growth driver. While I am disappointed with TI as an industry observer, I also think that the company has compensated for this loss to a certain extent through its aggressive pursuit of the analog business. For now however, with the bird in hand slowly escaping, I think TXN’s stock price continues to hover around its intrinsic value.

Posted by Vijay Nagarajan at 1:00 AM  

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