Is Texas Instruments Stock Overvalued?

Texas Instruments Incorporated (NASDAQ:TXN) is not having an easy time on Wall Street right now. Over the past three months, the company’s stock has declined by about 12%. It is currently trading lower than its 50-day and 200-day moving averages so price action has been weak.

We take a look at Texas Instruments a bit more closely to see whether its valuation is currently justified or if it is a buy on the dip.

TXN Gross Margins Are Persistently High

Texas Instruments isn’t a specialist chipmaker like NVIDIA but instead serves six end markets: industrial, automotive, personal electronics, communications equipment, enterprise systems, and others. The company produces embedded and analog processing products that make up about 90% of its top line.

It has approximately 80,000 products that are used by 100,000 customers and relies on a strong manufacturing foundation to lower costs that leads to better control over its supply chain.

Because it sells such a wide variety of chips, Texas Instruments lacks the flair of a chip company that is powering AI large language models LLMs. This is more of a steady eddy semi stock with persistently high gross margins of 57.7% last quarter and generally hovering around 60% in most quarters. 

Late last year, Texas Instruments and the U.S. Department of Commerce announced an award of up to $1.6 billion in direct funding through the CHIPS and Science Act that supports investments through 2029.

The funding is in place to help the company’s three new 300mm wafer fabs, which are currently under construction in the states of Texas and Utah. In addition, the company is set to receive a tax credit of an estimated $6 billion to $8 billion. That alone should be a boon to the bottom line.

How Is Texas Instruments Performing at the Moment?

Texas Instruments last reported a decline in its fourth quarter and full year results for fiscal 2024. Revenues fell by 2% from the prior year’s period to $4.01 billion, driven largely by the sharp decline in sales in the embedded processing segment, which tumbled by 18% year-over-year to $613 million.

Although this is not the company’s largest segment in terms of top line weighting (that credit falls to the analog segment), this deterioration had a broad-based impact because the analog segment had a small 2% rise in its revenue to $3.17 billion.

Profitability has been on the demise with operating profit sliding from $1.53 billion in Q4 2023 to $1.38 billion in Q4 2024, largely due to weakness in the embedded processing segment. That unit saw operating profits decline by a significant 70% from the year-prior level to $58 million. Operating profit from the analog segment also dropped by 3% year-over-year to $1.24 billion.

TXN Has Made Massive Investments

The highly profitable nature of the business means Texas Instruments top brass have had the luxury to make massive investments over the past decade, and allocated $94 billion to R&D, working capital and inventory.

Those investments have paid off in terms of free cash flows which were $806 million last quarter alone and that followed a streak of positive cash flow quarters over the past few years, many well in excess of a billion dollars.

On a trailing-12-month basis, Texas Instruments returned $5.72 billion to shareholders as of Q4 2024, of which $4.80 billion were paid as dividends. The company last declared a quarterly dividend of $1.36 per share amounting to an annual dividend of $5.44 per share, which yields 3.00% at prevailing prices.

Is Texas Instruments Stock Overvalued?

Texas Instruments is not overvalued according to analysts who have placed a consensus fair value price target of $205.69 per share on it. That view is not entirely supported by cash flows because a discounted cash flow forecast analysis puts fair value at $166 per share, suggesting downside risk of 8.9%, even after the recent share price slide.

Jim Cramer, from “Mad Money” fame on CNBC, believes that a slump in industrial and auto chips demand has weighed on TXN financials. It does seems to be trading at a premium in spite of that with the price sitting at 9.98x forward sales, which is significantly higher than the industry average. 

Adding to the concerns, 11 analysts have downgraded their estimates for the upcoming quarter which is not a big surprise given that the company trades at a 34x price-to-earnings ratio, thought admittedly 17% net income growth forecasts over the next 5 years are nothing to sneeze at.

For long-term investors TXN has stood the test of time and is a really interesting stock to keep a close eye on. After all it’s figured out how to create a moat as evidenced by the fact that it has persistently high gross margins and, at last count, delivered $4.79 billion in net income on $15.6 billion in revenues.

Add a 3% dividend to the mix and there’s enough to like to add Texas Instruments to a watchlist at a minimum and perhaps pounce when the valuation creeps into more attractive territory.

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