Is Texas Instruments Stock a Buy Now?

Texas Instruments (TXN -2.33%) impressed investors with a solid fourth-quarter earnings report on Jan. 25. The diversified chipmaker's revenue rose 19% year over year to $4.83 billion, beating estimates by $400 million. Its net income increased 27% to $2.14 billion, while its earnings per share (EPS) improved 26% to $2.27 and topped expectations by $0.33.

TI's headline numbers look healthy, but is it safe to buy its stock as rising interest rates rattle the tech sector? Let's dig deeper to find out.

Image source: Getty Images.

How does Texas Instruments make money?

TI doesn't manufacture high-end CPUs and GPUs. Instead, it produces less powerful analog and embedded chips for the automotive, industrial, consumer electronics, and communication markets.

These chips cost less to develop and manufacture than more advanced chips, but they still provide essential power management, wireless connectivity, and data transfer features. Connected vehicles, industrial machines, smartphones, and other gadgets rely on TI's chips.

TI is also fairly well insulated from the global chip shortage since it manufactures its analog chips (77% of its 2021 revenue) at its own plants. It outsources some of its embedded chips (17% of its revenue) to third-party contract chipmakers. The rest of its revenue came from other products, including display chips, calculators, and custom ASIC products.

TI struggled in 2020 as the pandemic disrupted its orders from automotive and industrial customers, which together accounted for 57% of its revenue during that challenging year. But the pandemic-related headwinds waned in 2021, and those two markets, which together generated 62% of its annual revenue (41% automotive and 21% industrial), both recovered.

How rapidly is Texas Instruments growing?

TI started to recover from the pandemic's initial impact in the second half of 2020. It continued to grow throughout 2021 as its combined automotive and industrial revenues rose more than 30% for the full year. That growth reflected the market's demand for smarter vehicles and industrial machines.

Source: Texas Instruments. YOY = Year over year.

TI's gross and operating margins also continued to expand both sequentially and year over year. That expansion can be attributed to its ongoing transition from 200mm to 300mm wafers, which reduces the costs of its unpackaged parts by about 40%. TI believes its gross margins will eventually reach 70% to 75% over the long term as it continues its 300mm expansion.

TI's robust revenue growth and expanding margins enabled it to grow its free cash flow 15% to $6.3 billion for the full year. During the year, it spent just 62% of that FCF on its dividend, which has been raised annually for 18 consecutive years and currently provides a forward yield of 2.6%.

A healthy outlook and reasonable valuations

For the first quarter of 2022, Texas Instruments expects its revenue to rise 5%-14% year over year and its EPS to grow 7% to 22%. Both estimates matched analysts' expectations.

For the full year, analysts expect TI's revenue and earnings to grow 8% and 9%, respectively, as its post-lockdown comparisons normalize. For 2023, they expect its revenue and earnings to both rise about 3%, marking a return to its low-single-digit growth in previous years.

Those growth rates might seem unimpressive, but TI's stable revenue growth, expanding margins, firm profitability, and dedication to returning most of its FCF to shareholders through buybacks and dividends could make it an appealing investment as rising interest rates rattle the tech sector.

TI also still looks reasonably valued at 21 times forward earnings. That makes it bit pricier than Intel (INTC -2.27%) and Qualcomm (QCOM -2.50%), which trade at 14 times and 16 times forward earnings, respectively, but TI's business is also better diversified and less capital-intensive.

Intel generates most of its revenue from the PC and data center markets, and it's been aggressively ramping up its spending to catch up to Taiwan Semiconductor Manufacturing (TSM -3.41%) and Samsung in the "process race" to manufacture the world's most advanced chips. Qualcomm, which generates most of its revenue from the smartphone market, also faces plenty of pressure to stay ahead of MediaTek and other mobile chipmakers.

TI doesn't face any of those pressures. Instead, it only needs to gradually expand its 300mm plants to profit from the ever-growing need for more analog and embedded chips in smarter machines.

Why you should invest in Texas Instruments

TI is an ideal stock to hold as interest rates rise because it's profitable, reasonably valued, and pays a healthy dividend. It also provides investors with long-term growth, since it will benefit from the secular expansion of the connected auto, driverless, and industrial Internet of Things (IoT) markets.

That blend of value, stability, and growth make TI a rock-solid investment -- and one which will likely outperform the market's wobblier tech stocks this year.