Semiconductors -- the brains of our modern electronic and computing infrastructure -- have seen rapid growth over the past few decades. From cloud computing to artificial intelligence (AI) to smartphones, companies around the world are growing their need for semiconductors, presenting a huge opportunity for the manufacturers of these products.
Popular stocks within the industry are Nvidia, Taiwan Semiconductor Manufacturing, and AMD. All have put up great returns for shareholders, but I don't think any are the best semiconductor stock to buy for the long term. Here's why stalwart giant Texas Instruments (TXN 1.77%) is the best semiconductor stock to own this decade and beyond.
Electrifying and digitizing industries
You may know the Texas Instruments (TI) brand from the extra large calculators used in schools, but the company's main business is manufacturing semiconductors. Specifically, it builds lagging-edge analog and embedded computer chips for the industrial, automotive, and personal-electronics markets. Lagging edge means that TI doesn't sell the latest and greatest technologies in the industry but has a reliable and diverse customer base for simpler products that belong in automobiles and factories.
Even though TI's products are generally older and have been in production for a while, there has been a growing demand for analog semiconductors to power two huge transformations: the digitization of factories and the electrification of the automotive market. Many factories and industrial systems are embracing sensors, software, and other tools throughout their complex systems to improve efficiencies.
For example, the digital twins market -- which means interactive digital copies of physical systems -- is projected to grow at a 37% annual rate through 2030. Many of the sensors and computer chips within these factories come from TI.
The electrification of the automotive market is a well-known phenomenon, thanks to Tesla and its famous CEO Elon Musk. Electric vehicles (EVs) are projected to make up over 50% of the global automotive fleet by 2030, which is a huge transition. What's little known about EVs is that they take many more semiconductors to operate than combustion-engine vehicles, providing a huge opportunity for companies like TI.
In order to grow into this demand, TI is planning to spend around $3 billion a year on capital expenditures this decade. That's a lot of money, compared to its current revenue of $20 billion. But with such a large opportunity ahead of it, TI looks poised to earn great returns on all this invested capital.
Strong capital allocators at the helm
What's great about TI is it's not only a business with strong growth prospects, but it also has an executive team with a fantastic track record of capital allocation. From 2004 to 2021, TI raised its dividend every year, going from $0.09 to $4.60. The company has been a consistent purchaser of its own stock, reducing shares outstanding by 46% over that same time period.
According to management, the consistent buybacks and payout growth will continue this decade, improving the forward-return profile for TI shareholders.
Risks to watch
No investment comes without risk, and I see two with TI stock at the moment. One is short term, and the other is long term.
In 2023, investors should be watching if customer demand wanes for TI. Even though its end markets are poised to grow over the long haul, the semiconductor market has gone through wild swings since the start of the COVID-19 pandemic.
Last year, there was a huge shortage of semiconductor components in the automotive market, which caused TI to ramp up production as much as possible. It also contributed a lot to its growing top line. If this shortage turns into a semiconductor glut for the automotive market in 2023, TI's revenue could decline.
Over the long term -- and this is a much more important risk to watch -- TI will need to manage a CEO transition. Long-time CEO Rich Templeton just announced his resignation from the company, elevating president and 24-year company veteran Haviv Ilan to the position.
Templeton has been a fantastic CEO for TI, making these big shoes to fill for Ilan. Time will tell if he's up to the task, but executive transitions are never seamless and always present risks for shareholders.
Overall, TI is a great business that has multiple industry tailwinds and consistently returns cash to shareholders. These ingredients are needed for generating strong shareholder returns, which is why I think TI is the best semiconductor stock to own this decade.
