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Texas Instruments Will Benefit From the Artificial Intelligence Boom

Texas Instruments (NASDAQ:TXN) has been underperforming the Nasdaq Composite year-to-date with gains of nearly 3% versus the index's gains of 20%. Does this huge gap signal potential problems for this technology company? Perhaps in the near-term, but I would argue that there is a lot of hidden value for Texas Instruments for three main reasons: growth in the free cash flow, a strong dividend and artificial intelligence (AI) tailwinds.


Texas Instruments Will Benefit From the Artificial Intelligence Boom
Texas Instruments Will Benefit From the Artificial Intelligence Boom

Texas Instruments has a remarkable free cash flow trend

Rich Templeton, chairman of the board at Texas Instryments, once stated that, The best measure to judge a companys performance over time is growth of free cash flow per share, and we believe thats what drives long-term value for our owners."

I cannot agree more. Free cash flow is one of my favorite financial metrics as it connects two basic elements together, profitability and valuation. Free cash flow has the net income component among its equation, and when a company generates positive free cash, it can use it for many business purposes, including to pay off debt, increase the dividend, invest it back in its business, or even explore acquiring another company that will drive growth higher. High and sustainable free cash flow generation thus has great potential to lead to higher valuations for a stock assuming there is no stock dilution.

Texas Instruments has delivered very strong free cash flow growth historically, with cash flow acheiving an 11% annualized growth for the period of 2004 to 2022. At the same time, there has been a 47% reduction in share count as the company consistently bought back shares. This is the kind of shareholder focus that value investors love to see, showing management is very committed to the stock price performance. With the combination of share buybacks and business growth, Texas Instruments has seen its share price grow from $26 back in 2004 to approximately $170 as of this writing.

The balance sheet is healthy and dividend growth is stable

Texas Instruments has a debt-to-equity ratio of 0.66, which is reasonable, and an interest coverage ratio of 40.9, which is very healthy and strong. The dividends per share have been stable in the past 10 years and have also been increasing. The payout ratio of approximately 53% is safe and leaves room for further dividend increases.

Texas Instruments Will Benefit From the Artificial Intelligence Boom
Texas Instruments Will Benefit From the Artificial Intelligence Boom


TXN Data by GuruFocus

Texas Instruments is well-positioned to benefit from AI

AI and semiconductors have a mutually beneficial relationship, with each field enhancing the capabilities and potential of the other. Thus, Texas Instruments has a huge opportunity to benefit from the growing AI trend.

AI algorithms often require massive amounts of computational power to process and analyze vast amounts of data. Semiconductors, especially specialized processors like graphics processing units (GPUs) and application-specific integrated circuits (ASICs), deliver the high-performance computing needed to accelerate AI tasks such as deep learning, natural language processing and computer vision. These processors are designed to handle parallel processing and perform complex calculations efficiently, improving the speed and efficiency of AI systems.

Semiconductors play a crucial role in improving the energy efficiency of AI applications. Low-power semiconductor designs, such as system-on-chips (SoCs) and field-programmable gate arrays (FPGAs), enable the deployment of AI algorithms in resource-constrained environments like mobile devices, edge computing devices and Internet of Things (IoT) devices. By optimizing power consumption, semiconductors help extend battery life, reduce operational costs and make AI more accessible in various domains.

Training deep neural networks, a key component of AI, requires significant computational resources. Semiconductors designed for AI workloads, such as GPUs and ASICs, enable faster training times by parallelizing computations across multiple cores. Similarly, during the inference stage, where AI models make predictions on new data, specialized chips like tensor processing units (TPUs) offer accelerated performance and reduced latency, enabling real-time AI applications. Other benefits worth mentioning are customization and flexibility, edge computing and IoT applications and advanced sensor integration.

The combination of AI and advanced semiconductors has facilitated the deployment of AI algorithms directly on edge devices in real-time. This is particularly important in applications where low latency, privacy, or bandwidth constraints exist, such as autonomous vehicles, smart cameras and industrial IoT. Semiconductors enable on-device processing, reducing the need for constant data transmission to the cloud, improving response times and enhancing privacy and security.

Of course, not every semiconductor company makes the best products. It's still a highly competitive field, but a rising boat lifts all tides, and in any case, Texas Instruments has some key areas of expertise. For example, the company boasts that its vision processors are excellent for AI applications.

Conclusion

Overall, Texas Instruments has a solid history of value creation, and it is clear the management is dedicated to shareholder returns. Combined with the long-term growth potential of AI, I believe the stock looks attractive at this time and has the potential to reward patient investors.

This article first appeared on GuruFocus.

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