The company is allocating its capital to increase its 300mm wafers capacity, which will give an advantage in analog markets like power management. This demand is driven by various modern technologies such as 5G, Internet of Things (IoT), high-performance computing and automotive semiconductors.
It is worth mentioning that while competitors like NXP Semiconductors (NXPI, Financial) raised prices in response to the strong demand in 2020, Texas Instruments made a choice to focus on volumes and build inventory as well as production capacity to serve the semiconductors market. Overall, the company's strong product line-up and its efficient manufacturing strategies are expected to be growth drivers for 2021.
Recent financial performance
Texas Instruments has witnessed excellent top-line growth as well as profitability over the past few quarters.
For the most recently reported quarter, the fourth quarter of 2020, the company reported a top-line of $4.08 billion, which was a staggering 21.67% growth as compared to the $3.35 billion in revenue reported in the corresponding quarter of 2019. The company cruised past the analyst consensus estimate of $3.61 billion.
Its revenues translated into a gross margin of 64.92% and an operating margin of 45.31%, which was also higher than that in the prior-year quarter.
Texas Instruments reported net income of $1.69 billion and adjusted earnings per share (EPS) of $1.80, which surpassed the average Wall Street expectation of $1.34.
In terms of cash flows, the company generated $2.13 billion in the form of operating cash flows and spent $996 million in investing activities.
Industrial and automotive consumption
Among the six end markets of Texas Instruments, the industrial segment derived the highest revenue, followed by the automotive sector, which acted as key growth drivers for the overall revenue of the company in 2020.
The management stated that industrial and automotive customers are increasingly turning to analog and embedded technology in order to make their end products smarter, safer, more connected and more efficient. Such trends have resulted in growing chip content per application, which is expected to be a huge catalyst for future growth.
Additionally, the company continues to focus on the infotainment, body electronics, hybrid electric vehicle and powertrain segments of the automotive market. Texas Instruments made significant progress on advanced driver-assistance systems, shipping millions of chips into this market, and is expected to maintain this pace since the electronic content in cars continues to increase.
The 300mm fab upside
Texas Instruments continues to invest in manufacturing capacity and technological upgrades, since this approach has shown tangible benefits of lower costs and greater control over the supply chain.
The company is ramping up its production of 300mm silicon wafers for its analog processors, and the new 300mm fab plant is expected to be completed by 2022. Notably, output from 300mm fab is 40% less expensive than chips produced using the 200mm process, the size which is used by most of its closest competitors.
As per the management, the fully equipped plant will have the potential to generate revenue of about $5 billion per year. Moreover, 300mm fab plants tend to be highly economical for high-volume analog markets such as power management chips, an area that has application in the company's industrial and automotive end markets.
Power management analog devices help regulate power usage in order to optimize power consumption, keep devices cooler and extend battery life. According to a report by SEMI Market Research, the chip industry is expected to add 38 new 300mm volume fabs by 2024, and I think Texas Instruments is uniquely positioned to benefit from this space.
As we can see from the chart above, the stock price of Texas Instruments has increased by more than 70% in the past 12 months. The stock is currently trading at an enterprise-value-to-revenue multiple of 12.23 and a price-earnings ratio of 32, which are definitely on the higher side with respect to the semiconductors space.
I believe that Texas Instruments is strategically positioned to benefit from tailwinds in industrial, transportation and consumer electronics, but it has limited scope for multiples expansion as a more mature company, and the stock appears to be a bit expensive. Overall, I think that the best approach if investors want to profit from such a richly valued company would be to buy on dips and hold tight over the long term.
Disclosures: No positions.
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