What Does the Future Hold for Texas Instruments

Joel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Texas instruments (NASDAQ: TXN) recently increased its revenue target from $2.69 - $2.91 billion to $2.80 - $2.91 billion, owing to better demand. Earlier, the company had complained of “weak demand” and tepid conditions in the Chinese and European economies. Furthermore, it exited the smartphone business and decided to wrap it up as early as Q2 2013.

Recently Texas Instruments left the mobile business, and its CEO had this to say: “It's that if you don't think the movie's going to end well, don't stick around, okay, because it's probably not if you've got that confidence.” TI is mainly a semiconductor manufacturing company with a formidable presence in the analog market.

With its entry in the mobile processor market, TI had thought of tapping the booming smartphone space. But things did not turn out well. Two of the major mobile device manufacturers, Apple and Samsung have in-house chip designing facilities. Besides this, TI couldn't stand a chance against the likes of NVIDIA and the mobile chip king, Qualcomm (NASDAQ: QCOM). And though it may have hurt margins, I’d say it was a rather good decision by TI.

So what’s next for Texas?

Well, the Dallas-based company is going heavily into analog and embedded chips which highlights a shift towards industrial products with long gestation periods. This is the reason why TI has been investing money for a long time in the acquisition of National Semiconductor. This is, in a way, following Qualcomm, which, after its acquisition of Atheros Communications cemented a strong presence in the wireless segment.

But unlike TI, Qualcomm seems to be diving further into the smartphone arena with a rather interesting tie-up with one of Vietnam’s largest multinational companies – The FTP Group. The venture aims at introducing the first indigenously manufactured smartphone in Vietnam, which would be available for as little as $50. Not exactly a thing that would drive margin growth, but that’s Qualcomm’s problem. 

Texas Instruments is eyeing automotive as one of the major propellers of growth. The idea is to make smarter cars and make more cars smart. It is notable to mention STMicroelectronics (NYSE: STM) here, whose strategies are focused towards segments such as Sensors, Imaging, MCUs, standard logic, and display drivers, which again is a field with a growing market.

This company has made important innovations in the field of power management, imaging, and security. STMicroelectronics’ efforts have now placed it amongst major wireless players in segments with growth projections of almost 17% over the next four years, according to market-research firm IHS iSuppli.

TI’s acquisition of National Semiconductor will yield superior returns, along with product life cycles that are far longer than those in the incessantly competitive mobile market. This, in turn, will pave the way towards a strong future for the company with robust foreseeable demand.

The Foolish bottom line

The company is returning cash in the form of buybacks and dividends. Strong free cash flow coming from the maturing Analog and Embedded Processing segments will offer returns with modest capital investment. Further, the company has judiciously invested in productive capacities in the past few years that can feed future growth easily without further outlay. It will be saving around $450 million annually from closure of the wireless business. 

I am confident that Texas Instruments is moving towards a more prosperous and stable future that would allow it to become a big player in this market, similar to STMicroelectronics. The analog chip market has a lot of potential, and TI is getting ready to experience that in the near future.

Joel Gomes has no position in any stocks mentioned. The Motley Fool owns shares of Qualcomm. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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