Texas Instruments Incorporated (TXN) Has Upside Potential

Texas Instruments Incorporated (NASDAQ:TXN) has been on an upward trend since last October and has given investors a return of more than 20%. But, according to Gartner, global semiconductor revenue fell 3% to $297.6 billion in 2012, as compared to last year. It has also revised down its next year growth estimates to 4.5%. In the hugely competitive semiconductor market, this poses a threat to the long-term growth potential of Texas Instruments Incorporated (NASDAQ:TXN).

Texas Instruments Incorporated (NASDAQ:TXN) has been a major player in the analog and embedded processing market. These segments contributed 70% of the company’s revenue in 2012, as compared to less than 50% about five years ago.

Analog processor segment

Texas Instruments Incorporated (NASDAQ:TXN) is the market leader in analog semiconductors, with more than 18% share. This segment contributes the maximum revenue for the company. Its share is expected to further increase in the future, driven by the company’s greater focus and expanding product portfolio.

Acquisition of National Semiconductor has also helped the company to broaden its product line and to enter into important industrial markets. This also helped Texas Instruments Incorporated (NASDAQ:TXN) expand its capacity, which will result in accelerated growth. This acquisition helped the company increase revenue by 10% in 2012. National Semiconductor’s strength in power management, amplifiers, and interface chips will lead to further growth in Texas Instruments Incorporated (NASDAQ:TXN)’s revenue, due to the emerging synergy.

Embedded processor segment

IDC expects the embedded processor market to grow 23% from 2012 to 2016, and to reach $47.6 billion. This means 3.65 billion embedded processors will be shipped in 2016, as compared to 2.54 billion in 2012. Currently, Texas Instruments is the second largest player with 12% share. The main focus for the company in this segment has been new product development to broaden its portfolio and serve more customers. Revenue from the embedded segment declined 7% in 2012, but this was more due to macro factors.

Last year, the company announced its plans to stop focusing on smartphones and tablets. This was done to focus more on expanding its OMAP footprint in the embedded application. The company intends to use its wireless connectivity solutions in a broader set of embedded applications, which require fewer resources and less investment. This will allow it to capture more market share in this $19 billion market.

Cash flows for investors

The company increased its dividend by 33% to $1.12 per share annualized. It also added another $5 billion to its stock repurchase plans. In the trailing 12 months, the company has returned a total of $3 billion to its shareholders, i.e. 107% of free cash flow. This reflects the company’s confidence in the long term sustainability in its analog and embedded processing business model. The company generated more than $3 billion free cash flow, which is 16% more than a year ago.