Texas Instruments (TXN -1.20%) is often considered a safe long-term investment for conservative investors. Instead of developing expensive cutting-edge chips, TI only produces cheaper (albeit essential) analog and embedded chips for the automotive, industrial, personal electronics, communications infrastructure, and enterprise hardware markets.
Pumping out large quantities of those cheaper chips enabled TI to generate plenty of cash for big buybacks and dividends. That's how it reduced its share count by 48% over the past 20 years while raising its dividend annually for 19 consecutive years. Its stock has risen nearly 1,000% over the past 20 years and generated a total return of more than 1,500%.
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Past performance never guarantees future gains, but TI's latest numbers suggest it still has plenty of room to run. I've already covered many aspects of TI's business before, but today I'll focus on three lesser-known facts about TI -- and what they can tell investors about the resilient chipmaker's past, present, and future.
1. It surrendered the mobile market to Qualcomm
TI didn't always produce cheap analog and embedded chips. Back in 2002, TI partnered with STMicroelectronics to develop a new series of Open Multimedia Applications Platform (OMAP) processors, which combined Arm-based CPUs with several specialized co-processors.
TI's OMAP chips were subsequently installed in Motorola's Droid phones, Amazon's Kindle Fire, Samsung's Galaxy Tab 2, and other tablets, but it struggled to keep pace with Qualcomm's Snapdragon system on chips (SoCs), which bundled together Arm-based CPUs, GPUs, and baseband modems in a single package. In 2012, TI shut down its entire consumer phone division.
TI's exit from mobile chips shaped its current strategy of only producing lower-end analog and embedded chips instead of higher-end application processors. That pivotal decision -- along with its ongoing transition from 200 mm to 300 mm wafers (which reduces its production costs by about 40%) -- caused its gross margin to soar over the past decade.
Source: YCharts
2. It will benefit from the CHIPS and Science Act
Last August, the Biden administration signed the CHIPS and Science Act into law and allocated $280 billion in new funding to the development and production of semiconductors in the United States. The package includes $52 billion in subsidies for chipmakers that build manufacturing plants within the U.S. and produce their chips domestically.
TI will benefit from those subsidies, since it's an integrated device manufacturer (IDM) that produces most of its chips at its domestic fabs. That makes it different from "fabless" chipmakers like Qualcomm and Nvidia, which outsource their production to third-party contract chipmakers like Taiwan Semiconductor Manufacturing (NYSE: TSM).
Those subsidies could make it much easier for TI to ramp up the expansion of its 300 mm fabs. Last year, it said it would boost its capital expenditures to about $3.5 billion annually, or a mid-teens percentage of its revenue, over the following four years to upgrade those fabs. It also plans to keep its capex elevated at around 10% of its revenue from 2025 to 2030.
3. TSMC might not exist without Texas Instruments
Morris Chang, the founder of Taiwan Semiconductor Manufacturing, worked at TI for 25 years and became its global VP of semiconductors. But in his own words, Chang was "put out to the pasture" instead of being promoted to the C-suite. Chang eventually returned to Taiwan, led the government-funded Industrial Technology Research Institute (ITRI), and founded TSMC in 1987. So if TI had simply promoted Chang to a top position, TSMC might not have become the contract chipmaking behemoth it is today. Analysts currently expect TSMC to generate more than four times as much revenue as TI this year.
That isn't surprising, since TSMC is now the world's largest contract chipmaker, while TI still generates all of its revenue from first-party chips. However, it's interesting to wonder what could have happened to TI if Chang had become its CEO in the 1980s. Would TI have evolved into a domestic contract chipmaking giant like TSMC -- which might have prevented the production of chips from going overseas -- or would it have still pivoted toward the production of cheaper first-party chips?
That's an intriguing question, but I personally think Taiwan's ITRI, which also hatched TSMC's rival UMC, could still have created another contract chipmaking giant without Chang at the helm. At the same time, I think TI's board would probably have rejected the idea of turning the company into a pure-play contract chipmaker -- since it would have been cheaper to set up an operation of that scale in Asia.
Is Texas Instruments still an evergreen investment?
TI has gone through several major evolutions throughout its 72-year history, but I believe the current business is poised to grow for decades to come. It's definitely not an exciting growth stock anymore, but its slow but steady returns could still beat the market over the long term as the semiconductor market expands.
