TI’s Stability is Not a Feature, it’s a Bug
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Texas Instruments (NASDAQ:TXN), the world’s biggest manufacturer of analog chips, surprised investors last week by upping their guidance for the upcoming quarter saying in spite of a sluggish market. Revenues are expected to be between $3.37 and $3.41 billion while profit will be between $0.38 and $0.41 per share. This was largely attributed to a $60 million insurance benefit from the Japanese earthquake and successful cost cutting measures, as they shut down its semiconductor plants in Houston and Japan earlier in the year.
Its $6.5 billion acquisition of National Semiconductor has ensured that Texas Instruments remains the market leader in analog chips for various electronic devices from washing machines to military radar systems. PC chips make up 15-20% of the business and it's their diversified portfolio that insulates it from the changes happening within the PC world. Whereas the market leader, Intel (NASDAQ: INTC), had to cut its forecasts for the rest of the year. AMD is in a similar position.
Demand for all computing devices, except tablets, is weakening, both due to changes in taste and the fragile economic conditions around the world. For TI, their OMAP SoC has netted a couple of high profile design wins in the prized tablet space, as it will be powering the new Kindle Fire’s from Amazon (NASDAQ: AMZN). The new line of Kindle Fires is truly the first tablet to create a value proposition based on the tablet itself. As I’ve stated recently the tablet is a conduit for the ecosystem behind it. Without the apps, games and media to consume they are not compelling devices on their own. The competition from the Kindle has been strong enough to warrant a response from Apple as it launches the iPad mini later this year.
Both Apple and Samsung, the dominant forces in the tablet industry, have focused on vertical integration which Texas Instruments believes is damaging the entire chip industry. The primary chip manufacturers disagree believing one designs better chips and grabs market share. It’s a strategy that Qualcomm (NASDAQ: QCOM) employs and with their commitment to R&D (20% of gross revenues, or $3 billion dollars in FY2011) it is hard to argue with them and their success.
Wireless and Cell phones
The design wins for the OMAP processors were important for a wireless division that was failing with second quarter revenues falling by 39%. Texas Instruments develops baseband chips, OMAP processors and wireless connectivity chips in this segment. Being unable to compete with Broadcom they are phasing out basebands, which will be completed by the end of the year. And, while Apple and Samsung continue to develop their own SoCs, it was the dual implosion of both of its primary clients, Nokia and Research in Motion that beat sales into the ground. And Nokia has now moved its Lumia phones to Qualcomm’s Snapdragons, and if there is a turnaround story there it will happen without TI.
TI has definitely lost its first-mover advantage in the mobile chip space but they are still in a good position to gain back what was lost in 2012 when OMAP 5 devices show up in early 2013. The OMAP 5 series are dual-core A15 cores, similar to the rumors of what Apple has done with the A6 chip in the iPhone 5. Qualcomm doesn’t license the architecture from ARM, but rather the instruction set and then designs their own chips from the ground up. Their snapdragon S4 combines the best of the current technology, A15 core like performance and integrated LTE modem produced on a 28nm process for lower power consumption. The OMAP 5 will be the only other 28nm A15 SoC on the market in early 2013 as chips from Apple, Samsung and Nvidia are or will be 32nm.
As the smart phone market pushes towards lower price points and longer usage times the advantage of 28nm over 32nm will make itself felt as margins shrink even further. The question at this point is whether TI is truly committed to competing in this space or selling the assets off to someone who is.
Due to its diverse portfolio of products, Texas Instruments is a cash cow. But looking at the balance sheet there is more than $7.5 billion tied up in Goodwill and Intangibles and backing that out reduces the company’s value year over year. Their analog chip business is closely tied to the general economy so with a potentially ugly 2013 on the horizon that is not inspiring confidence.
TI trading at a P/E above 20 with a ~2.5% yield makes it a difficult sell at growth-stock valuations when it has almost nothing better in the only hot market likely to survive the next 24 months. The best that I see going forward is TI picking up the business that Qualcomm cannot supply in budget-minded devices where the margin on the device itself is minimal, i.e. The Kindle Fire. Trading at metrics similar to Qualcomm but with lower R&D expenditures and a less interesting portfolio, TI is hard to recommend here.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com, Intel, and Qualcomm. Motley Fool newsletter services recommend Amazon.com and Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.