Texas Instruments (TXN), which I've been watching go nowhere since I bought 100 shares of it early this year, may be about to catch a break.
Most of the focus in this story is in Amazon, which is selling the Kindle Fire at cost and would presumably use TI's facilities to drive costs down even further. The company's biggest rivals, Apple (AAPL) and Samsung, already have control over their supply chains, so most analysts see this deal as logical.
But let's look at it from the other side.
TI would be exiting mobile to go further into the embedded chip business, where gross margins can be as high as 55-60%. Such chips would go into cars and smart appliances, and TI's strong position in this area could put it into position to create standards for the Internet of Things, a market that has yet to take off mainly due to a lack of such standards.
TXN has been investing heavily in power over ethernet (PoE), a technology that delivers electricity over networking systems. The company is also active in electrical metering, which is going to face a major upgrading as utilities accept more renewable energy and seek cheap solutions to the problems of variable inputs and outputs.
All these are markets with great opportunities for growth but not a lot of competition, in contrast to the wireless business, where there are huge volumes, wafer-thin margins, and tons of competitors which may make deals for reasons other than base technology.
So where would you prefer to be - in fast-growth markets with minimal competition, where you have a chance to set standards, or in maturing markets that, while large, show slower growth and more competitive threats? Especially if, as in the case of mobile, not all those competitive threats are related to pure technology, and more related to the desire by major players to gain control of their supply chains.
I think TXN is making the right call here.
Analysts are downgrading shares of TXN but the words horse and barn door come to mind. The problems that have been endemic to the company for the last two years are being addressed by the Amazon deal, and TI could get cash or even a highly valuable currency in the resulting deal.
In contrast to other analysts I see this as a buying opportunity for TXN, and a net negative for Amazon, which may find running a chip factory to be more trouble than it's worth.
Disclosure: I am long TXN.