How Texas Instruments Can Take Share In The Analog Semiconductor Market

Apr.11.13 | About: Texas Instruments (TXN)

Texas Instruments’ (NASDAQ:TXN) designs and manufactures semiconductors for sale to electronic designers and manufacturers. Barring 2010, its revenue has continuously declined over the last few years. Nevertheless, it is still featured among the top five semiconductor vendors in terms of revenue in 2011 and 2012. [1]

Accounting for more than 50% of its revenue and contributing over 65% to its valuation, the analog semiconductor business is the most important division in TI’s portfolio. TI’s analog product portfolio consists of high volume analog and logic, high-performance analog and power management. It caters to over 90,000 customers from various industries such as computing, wireless communication, infrastructure, automotive, telecom, etc.

Though TI remains the leading player in the analog semiconductor market, its market share has declined in the last few years. However, we believe that with the acquisition of National Semiconductor, TI has a well rounded portfolio to leverage growth in the analog market. Additionally, its leadership in voltage regulators and a significant expansion in manufacturing capacity over the years places it in a strong position to accelerate growth in its analog business.

We believe that TI’s market share will increase slightly over our review period, from 18% in 2012 to over 20%. In this article we discuss our rationale behind our forecast.

Analog Semiconductor Market To Expand At A CAGR of 5%

Analog semiconductors are used to change real-world signals – such as sound, temperature, pressure, or images – by conditioning, amplifying and then converting them to a stream of digital data that can be processed by other semiconductors. Analog products are used by companies spanning various industries such as computing, wireless communication, infrastructure, automotive, telecom and consumer electronics.

Historically, growth in the analog semiconductor market has tracked growth in the global semiconductor market. Both the semiconductor industry as well as the analog market grew at a CAGR of 3% between 2006-2011. On account of weak demand for analog products, the analog market grew at a slower pace compared to the semiconductor industry, in 2012.

(In USD Billion)

2006

2007

2008

2009

2010

2011

2012

Global Semiconductor Market

264

275

260

230

304

310

303

Analog Semiconductor Market

36.3

37.2

36.6

32.0

42.3

42.0

38.9

Click to enlarge

Source: iSuppli & Trefis

We forecast the analog market to track the semiconductor market in the future as well. The semiconductor market had a challenging 2012 on account of soft consumer end demand as consumer purchases represent approximately 60% of the industry revenue and silicon demand. [2] However, with improving macro conditions, the semiconductor demand is slated to pick up this year.

Increasing wireless application demand, rising smartphone and tablet shipments, next-generation computing platforms along with falling prices of ultrathin PCs and growing popularity of interactive TVs are all factors driving semiconductor demand in the future. As per research firm iSuppli, the semiconductor supply chain has reduced channel and finished goods inventory which implies that the market demand has started improving. [2]

Gartner predicts the semiconductor market will grow at a CAGR of 4.1% through 2016, and we forecast the rate to slow after that. [3] We estimate the analog market to grow at similar pace during the same period.

Growth In TI’s Analog Portfolio To Outpace Industry Growth

The fluctuation in TI’s analog revenue has almost been in line with the increase/decrease in the overall semiconductor industry. However, though the global analog semiconductor market has expanded from $36.2 billion in 2006 to $38.9 billion in 2012, TI’s analog revenues have remained more or less constant, barring a considerable increase in 2010.

(In USD Billion)

2006

2007

2008

2009

2010

2011

2012

TI Analog Revenue

6.86

6.72

6.59

5.43

7.54

6.38

7.00

Growth (%)

-

-2.01%

-1.96%

-17.56%

38.78%

-15.47%

9.77%

Click to enlarge

Source: Texas Instruments’ Annual Reports

Going forward, we expect growth in TI’s analog revenue to outpace the increase in the overall analog semiconductor market (CAGR of 5% till 2019). We forecast TI’s revenue to grow at a CAGR of 7% between 2012-2019, enabling the company to gain share in the analog market.

Here our some of the reasons that justify our rationale:

1. Acquisition of National Semiconductors: In 2011, TI acquired National Semiconductor, the 7th largest analog company with a 4% market share. With the inclusion of National’s portfolio, TI registered a close to 10% increase in its analog revenue in 2012, despite the market expanding by only 3%. We believe that National Semiconductor’s acquisition could be an important factor for accelerating growth in TI’s analog revenue.

We believe that National’s strength in power management, amplifiers and interface chips nicely complement TI’s existing portfolio of high-performance analog products. The combined product portfolio of the two companies place TI in a better position to leverage potential growth in the analog market.

2. TI’s Leadership in voltage regulators: TI remains the market leader in voltage regulators, which contributes around 30% to its analog division revenue. According to iSuppli, voltage regulators are set to grow at a CAGR of 16% through 2015, which is considerably higher than the growth rate for the entire analog segment (~5%). [4] Being a market leader in the domain, we believe, will help TI outpace growth in the analog market in the future.

3. Strongest manufacturing capability in the analog industry: TI has added around $7 billion worth of incremental revenue generating capacity in the last few years with the acquisition of National Semiconductor and some other companies’ fabrications and equipment and factories. Additionally, it has the industry’s first and only 300mm analog fab. While the excess manufacturing capacity might weigh on short-term growth, we feel the same will help TI further increase its market share as the economy stabilizes and analog demand accelerates.

4. Big Lead Over Competition: The expanding market opportunities pitches TI against a number of competitors in the market. However, with an 18% market share, TI is a leader in major analog product categories and has a big lead over its closest competitors - ST Microelectronics (10%), Qualcomm (6%), Infineon (6%) and ADI (6%). What sets TI apart is that it has a geographic presence in major end markets and a large sales and field application staff which caters to its diverse products and business operations.

Valuation Impact

If TI’s competitors expand their operations or enhance their product capability relative to TI’s portfolio, it could negatively impact TI’s competitiveness in the market. If TI’s market share declines to 15%, there could be more than 10% downside to our price estimate.

On the contrary, TI’s strong manufacturing capability might help it outpace competition when industry demand accelerates. If TI’s share increases to 22%, there would be more than 10% upside to our price estimate for the company.

Disclosure: No positions.