Saturday, 10 October 2015

Texas Instruments: Differentiation, Apple Content Concentration And Cost Savings

Texas Instruments (NASDAQ: TXN)
Technology; Semiconductors; BUY

Analog ICs will witness the fastest semiconductor growth rate in coming years. TXN is a major provider of analog ICs. Product analysis reveals differentiation; IC count increased in iPhone 6s. Transition to 300mm will bring cost savings; valuation reveals 25% asymmetric upside.

TXN generates majority of its revenue from the sale of its analog ICs. For the past couple of years the company has been producing more than 50% of company’s total revenue from this particular segment. This indicates that the company relies significantly on its Analog operations for the majority of its sales. In 2014, TXN was the leading supplier of Analog ICs with a market share of 18%. Analog operations contributed 62% towards total revenue while embedded processors and other products contributed 21% and 17% respectively.

Based on the current price, we believe that TXN adds considerable value to investors’ portfolio given the introduction of new differentiated products, 200 mm to 300 mm wafer fabrication transition plan, improving CSR position, re-allocation of resources and increased chip count in Apple’s products. Our valuation model also demonstrates significant upside potential. Overall, Texas Instruments is a decent buy.