Texas Instruments Charts a Bold New Course

Shares of Texas Instruments (NASDAQ: TXN  ) are up a modest 0.1% today, bucking a generally negative market trend. Investors are cheering a surprise announcement of heavy cost cutting at the Texan chip giant, set to slash about 5% of the total payroll by the end of 2013.

The changes are concentrated in TI's wireless division. The company will refocus on a more general lineup of embedded processors, replacing the current spotlight on mobile computing.

If that switch sounds counterintuitive, TI has a perfectly reasonable explanation: Smartphone and tablet customers "are increasingly developing their own custom chips," which reduces the addressable market for a generalist like TI.

Apple (NASDAQ: AAPL  ) leads that custom-chip charge with the in-house A5 and A6 processors powering the entire iPhone and iPad lineup. There's no room for Texas Instruments' OMAP chips in the Apple lineup. Samsung also cooks its own chip designs, and is the largest mobile computing specialist in the world. That's another crossed-out opportunity. Elsewhere, NVIDIA (NASDAQ: NVDA  ) and Qualcomm  (NASDAQ: QCOM  ) have pretty much locked down the most attractive free-agent contracts.

Might as well back off and refocus, then.

And that's really what these cuts are all about -- a change of direction rather than a cost-cutting move. The company has hardly mentioned expense controls in the last few quarters. The company could use tighter profit margins, but it's hardly time to panic:

TXN Operating Margin TTM Chart

TXN Operating Margin TTM data by YCharts.

So TI pretty much exits the mobile market, stage right, to look for less crowded spaces elsewhere. "Momentum is already building with new embedded applications," said embedded processing SVP Greg Delagi. In other words, this move is a play on the quietly booming market known as "the Internet of things," where General Electric (NYSE: GE  ) and IBM (NYSE: IBM  ) are pumping billions of dollars into development.

And that's just the beginning. TI will look smart in a couple of years, when the mobile sector has matured and the whole world starts to connect all around us.

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