Texas Instruments (TXN 2.35%) is by no means the most exciting semiconductor company. But in tough times "boring" can be a good thing.
Texas Instruments (TI) was a standout performer during the global chip shortage over the last couple of years. Over the last decade, TI's total return -- which includes dividends paid -- was nearly 700%, as it benefited from a stock surge in 2020 and 2021.
A decade ago, this industrial technologist laid the groundwork for its leading position in automotive and industrial computing. Now, the chip shortage is beginning to ease, and TI's stock price has fallen in 2022 along with the rest of the semiconductor sector. However, with another decade of booming demand expected from its leading markets, this is a monster stock opportunity to take advantage of right now.
Investors fret over the short term
2022 was actually pretty good for TI. So far this year, the top chip stock handily beat the market, falling about 6.7% compared to a 16.7% drop for the S&P 500. It's been a volatile run, though, with shares down as much as 20% from their highs at various times.
The reason? Select segments of the overall chip shortage are starting to ease up. TI's revenue increased 13% year over year in Q3 2022 to $5.24 billion. However, the outlook for Q4 2022 implies revenue will be flat, at best, compared to the year prior.
About one-quarter of TI's sales come from consumer electronics, a segment of the tech world that's getting hit particularly hard right now. Even TI's industrial-tech segment is expected to decline in the final months of 2022.
As the chip shortage resolves itself, many of TI's manufacturing partners say they have some excess supply they're working through. This excess supply is expected to be used up within the next couple of quarters. The lone area of strength in Q4 is expected to be automotive, which is still suffering component shortages and thus playing catch-up to meet the current consumer demand for new vehicles.
Geared up for a decade of soaring demand
After the Q3 earnings update, TI stock now trades for less than 19 times trailing-12-month earnings. While this may seem pricey for a company expecting its growth to stall out in the coming months, it could be an incredible long-term value, considering what's expected to happen over the next decade.
Early in the 2010s, TI started winding down its allocation of capital to consumer electronics like smartphones and tablets. Instead, it began focusing on its automotive and industrial chip research and manufacturing capabilities. As mobile communications technology has proliferated since then, it might seem TI was missing out on a massive haul.
That's not exactly the case, though. TI isn't a cutting-edge chipmaker. Instead, it focuses on less-competitive analog chips that require little in ongoing advancement once they've been developed. Once TI got itself a slice of the mobile industry, it was time to reap the rewards from those chips and move on to the next big thing: automotive and industrial.
Fast forward to today. The auto and industrial markets now make up nearly two-thirds of TI's revenue, at exactly the time analog and embedded computing-system technology for cars and heavy equipment is expected to soar. Investors are worried about the outlook for the next couple of quarters, but let's not miss the next decade-worth of opportunity here. With electric vehicles, self-driving technology, and robotics just now starting to go mainstream, TI teed up plenty of growth for itself for the remainder of the 2020s.
To underscore the opportunity, the company is building out several new chip manufacturing sites in the U.S. alone -- one in Lehi, Utah, acquired from Micron Technology last year, and new facilities in Richardson and Sherman, Texas. The recent passage of the U.S. CHIPS Act legislation, designed to bolster U.S.-based chip fabrication, will help pay for some of TI's expansion.
Beyond the near-term dip, broad expectations are for TI to generate an average high-single-digit percentage revenue increase in each of the next few years, all while churning out incredibly lucrative free-cash-flow profit margins of 30% to 40% along the way. Management returns all of that excess free cash flow to shareholders via dividends (currently yielding 2.5% a year) and share repurchases, a strategy that made TI the market-beating investment it's been for many years.
Texas Instruments stock took a breather in 2022, but this looks like a monster opportunity emerging from the global chip shortage. If you're interested in investing in automotive technology and industrial robotics in the coming decade, give this top chip stock a serious look right now.
