Expanding 300-Millimeter Capacity Will Shape The Semiconductor Landscape

Key Takeaways

• Strategic investment in manufacturing capabilities is expected to bolster revenue growth and profitability through efficient demand fulfillment and reduced production costs.
  
• Increasing focus on industrial and automotive markets, along with strong China performance, is expected to drive significant revenue and earnings growth.
  
• Declines in major markets and challenges in Embedded Processing and inventory management may compress margins and impact Texas Instruments' short-term profitability and revenue growth.

Catalysts

Designs, manufactures, and sells semiconductors to electronics designers and manufacturers in the United States, China, rest of Asia, Europe, Middle East, Africa, Japan, and internationally.

• Texas Instruments is nearly 70% through a six-year elevated capital expenditure cycle to establish a dependable, low-cost 300-millimeter manufacturing capacity. This strategic investment is expected to enhance revenue growth and improve long-term earnings by meeting increasing customer demand efficiently.
  
• With industrial and automotive now comprising approximately 70% of TI's revenue, the focus on these markets is pivotal. As customers increasingly turn to TI’s analog and embedded technology for improved product reliability, affordability, and energy efficiency, this sector emphasis could significantly boost revenue growth.
  
• The transition of manufacturing from external foundries to TI-owned factories, particularly LFAB in Utah, is expected to enhance gross margins and free cash flow due to lower production costs, directly impacting profitability as these transitions proceed in 2025.
  
• The company continues to strengthen its financial position by maintaining a robust balance sheet with $7.6 billion in cash and short-term investments, facilitating strategic flexibility for acquisitions, R&D, or increased shareholder returns which could positively impact long-term earnings.
  
• Growth in the China market, driven by high demand in automotive and personal electronics, indicates robust regional performance. As China represents 20% of global GDP and TI's business aligns with this, TI’s positioning here may significantly contribute to revenue and earnings growth going forward.

Texas Instruments Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Texas Instruments compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Texas Instruments's revenue will grow by 17.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 30.5% today to 32.4% in 3 years time.
• The bullish analysts expect earnings to reach $8.1 billion (and earnings per share of $10.89) by about April 2028, up from $4.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 34.7x on those 2028 earnings, up from 28.8x today. This future PE is greater than the current PE for the US Semiconductor industry at 20.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.2%, as per the Simply Wall St company report.

Texas Instruments Future Earnings Per Share Growth

Risks

• Texas Instruments experienced a revenue decline of 3% sequentially and 2% year-over-year in the fourth quarter of 2024, primarily due to decreases in its largest markets, industrial and automotive, which could potentially impact overall revenue growth.
  
• The company is facing a sharp decline in its Embedded Processing segment with an 18% decrease, influenced by underutilization of the new Utah factory, which is likely to affect operating profit and net margins.
  
• With a gross profit margin decrease of 190 basis points in the fourth quarter, partly due to higher depreciation and reduced factory loadings, there is a risk of further gross margin pressure impacting overall earnings.
  
• The increased inventory levels and extended inventory days, coupled with factory underloadings, could lead to further profit margin compression if not managed carefully, affecting future free cash flow per share.
  
• Texas Instruments’ revenue outlook for the first quarter of 2025 includes a potential earnings per share decrease, driven by expected revenue declines and reduced interest income, which could lower short-term profitability.

Valuation

• The assumed bullish price target for Texas Instruments is $238.26, which represents one standard deviation above the consensus price target of $204.7. This valuation is based on what can be assumed as the expectations of Texas Instruments's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $284.0, and the most bearish reporting a price target of just $130.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $25.1 billion, earnings will come to $8.1 billion, and it would be trading on a PE ratio of 34.7x, assuming you use a discount rate of 9.2%.
  
• Given the current share price of $151.39, the bullish analyst price target of $238.26 is 36.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.