Over the past several years, Texas Instruments (NASDAQ:TXN) has taken investors on a lucrative ride, as its stock price has climbed sharply and steadily. In an industry in which many major players have fought hard against each other to provide the highest-end products possible to their customers, Texas Instruments has stuck with a couple of key areas in the chip world, focusing on analog applications, such as power management, as well as embedded processing and connectivity. Yet after seeing its stock take a momentary plunge in October, Texas Instruments has climbed back and now trades at its best levels since the late 1990s tech boom. Let's take a closer look at Texas Instruments to find out how it bounced back and whether it can sustain its gains.
The rise and fall of Texas Instruments
The event that set the stage for the 30% run in Texas Instruments stock came in early October, when a panic erupted throughout the entire chip sector. Reports from Microchip Technology (NASDAQ:MCHP) suggested that a decline in demand for semiconductor products could hurt its results, and tech investors extrapolated Microchip's bad news to affect companies as large as Texas Instruments, Micron Technology (NASDAQ:MU), and even Intel (NASDAQ:INTC). The fear was that if high-growth areas like China fail to see major chip customers building up their inventories sufficiently, then Texas Instruments and its peers could start to see the gains they've made erode.
Yet Texas Instruments quickly dispelled many of those fears, as its third-quarter financial report put to rest any suggestion of a near-term slowdown. In the key analog segment, which makes up more than 60% of Texas Instruments' overall revenue, sales jumped 11%, and operating profits climbed by an even more impressive 38%. The embedded processing segment also performed well, with more modest 6% gains in revenue that nevertheless added 37% to its operating profit.
Even more impressive was the fact that so many of Texas Instruments' specialty areas did well. The company said that Power Management led the analog division higher, but all of its product lines showed gains in revenue. Similarly, on the embedded processing side, all of its product lines provided roughly equal growth. With solid guidance as well, Texas Instruments investors quickly showed their optimism, sending the stock upward to multiyear highs.
Continuing to target growth
Despite the concerns that Microchip Technology raised about the industry overall, Texas Instruments continues to move forward with its growth initiatives. Earlier this month, the company opened a wafer-bumping facility in China, and as a result, Texas Instruments should be able to increase its capacity to produce 300-millimeter analog products. At the same time, Texas Instruments is working hard to expand its reach, with moves like gaining G-PLC certification for its power-line communication designs taking advantage of the rise in interest in smart-grid technology.
In the long run, though, one of the key drivers of growth for Texas Instruments could come from the Internet of Things. As more devices require connectivity, Texas Instruments will be in prime position to provide low-cost options that will help keep the Internet of Things cost-effective yet profitable for the company. Although the company hasn't seen as much growth from its embedded processor segment than in its core analog business, Texas Instruments nevertheless is working at beefing up its presence in the microcontroller market, and other opportunities should give the company the ability to play a larger role in serving an important and growing business within the tech sector.
Even with the big jump in Texas Instruments' share price recently, investors could still see further gains as long as the company's strategy remains in the sweet spot of the tech sector. With valuations that are still reasonable at current levels, Texas Instruments simply needs to see continued growth in its analog chips and embedded processors in order to keep climbing higher.
Dan Caplinger owns shares of Micron Technology. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.