Free Book: The Great Semiconductor Shift (Plus Trade Alert)

First off, Cody will do this week’s chat today at the regular time, 3:00pm ET in the TradingWithCody.com Chat Room or you can just email us at support@tradingwithcody.com. By popular demand, we will do next week’s chat on YouTube live.

Bryce here. The markets are mostly down this week and are getting pretty ugly at the moment as they are trying to digest earnings from a huge swath of companies. In tech land, Microsoft, Google, and Texas Instruments each reported last night and the results were mixed. Microsoft is up about 3% right now after the company beat estimates on the top and bottom line and reported better-than-expected cloud revenue, which was up about 29% Y/Y. On the other hand, Google is down almost 9% because its cloud business only grew 22% which fell slightly below analyst expectations of 25% growth. Overall, Google still reported a very solid quarter beating on both the top and bottom lines, and we saw nice growth in profitability as the company grew revenue 11% and operating margin grew to 28% from 25% last year.

Google’s stock is getting punished apparently because the market thinks that the differences between Microsoft’s and Google’s cloud growth are indicative of the adoption of their respective AI services. We think the selloff in Google is probably an overreaction and not truly representative of the AI capabilities of the company. Google will be releasing Gemini, its next-generation AI platform, by the end of the year or early 2024 and we expect it will be very competitive with or even better than OpenAI’s GPT-4. Google is a cloud-native company and all of its apps and services are built on the cloud which is one of the reasons that we think Google will have more successfully integrating AI across its entire ecosystem. Microsoft and OpenAI probably have a slight lead in the AI race right now, but we want to bet on Google’s capabilities and historical leadership for the long term. We picked up some GOOG call options dated out a couple of weeks with strikes between $127 and $131, and we are holding our GOOG common steady.

On another note, we just submitted our new book, The Great Semiconductor Shift, for publication on Amazon and it should go live sometime in the next three days. The paperback costs $24.99 on Amazon, but we are giving the book to all TradingWithCody subscribers for free and you can get it today rather than having to wait until next week. Here is a link to an advanced copy.

We are really excited about this book as we learned so much more about the details of the semiconductor industry and the intricacies of the 46 largest publicly traded companies in this sector. You’ll see that we included a rating scale that basically sums up our outlook on each company with respect to our view of its positioning for the Great Semiconductor Shift, as well as our view of the fundamentals and risks for each company. We think this will be an extremely helpful tool for all investors who own and/or short semiconductor stocks.

Texas Instruments (TXN) is one of the higher-rated stocks in the book (coming in at a 6.5). The company reported earnings last night and the stock is down about 3.5% right now, putting in fresh 52-week lows. We like TXN for several reasons discussed below and are picking up some in-the-money calls on the stock dated two to three weeks out which we intend to exercise if the options are still in the money at the expiration date. Here is the TXN write-up from the book:

Texas Instruments Inc. (NASDAQ: TXN)

Background

Texas Instruments, often abbreviated as TI, is a multinational semiconductor company headquartered in Dallas, Texas. Founded in 1930 as a geophysical services firm, it later delved into defense electronics during the Second World War. By the mid-20th century, TI ventured into the semiconductor business and made pioneering contributions, including the invention of the integrated circuit in 1958 by Jack Kilby. This breakthrough paved the way for modern electronic devices.

Today, TI is the leading manufacturer of analog semiconductors, which are fundamental components in a vast array of consumer electronic devices, industrial equipment, and automotive applications. TI explains that analog semiconductors “change real-world signals, such as sound, temperature, pressure or images, by conditioning them, amplifying them and often converting them to a stream of digital data that can be processed by other semiconductors, such as embedded processors. Analog semiconductors are also used to manage power in all electronic equipment by converting, distributing, storing, discharging, isolating and measuring electrical energy, whether the equipment is plugged into a wall or using a battery.”

TI is also a leading manufacturer of embedded products, which are essentially the digital “brains” of many types of electronic equipment. These low-cost microcontrollers are used in everything from electric toothbrushes to motor controllers. In 2022, sales of embedded processing products generated about 16% of TI’s revenue.

Business Model

TI sells into six end markets: industrial, automotive, personal electronics, communications equipment, enterprise systems, and others. The company expects the most growth in its industrial and automotive markets due primarily to the reshoring of the supply chain and the electrification of vehicles. In 2022, ICinsights.com estimated that TI controlled roughly 20% of the global market for analog semiconductors.

The company’s manufacturing process nodes are targeted towards 45nm to 130nm technologies, which are optimized for analog and embedded processing products. TI has three existing 300mm fabs (two in Texas and one in Utah) and one under construction in Sherman, Texas. TI has one of the largest portfolios of any IDM consisting of roughly 80,000 unique products, which include everything from smart thermostats and door locks to sensors for robots and autonomous vehicles. In 2022, the company reported having over 100,000 customers, the largest of which included companies like Cisco, Apple, Dell, HP, IBM, Lexmark, and Motorola. However, none of these end customers constituted more than 10% of TI’s revenue last year.

Our Outlook

TI is well positioned to see above-average growth for the foreseeable future as the “electrification of everything” trend continues to gain steam. TI should also benefit from the Reshoring and EV Revolutions. The company has a well-diversified portfolio of products that it sells to wide-ranging end markets. This probably insulates TI from a downturn in any given market but also limits its upside.

Given TI’s clear leadership in the analog semiconductor space, we like the company but the stock is a little expensive for our taste. Trading at 21.5x 2023 earnings estimates and with single-digit growth on the horizon, there are more attractive semiconductor stocks with exposure to these same Revolutions.

What Could Go Wrong With The Stock

• A downturn in the economy hurts TI which is more subject to cyclical pressures than many other semiconductor companies.
• Competition for analog semiconductors heats up and hurts TI’s relatively high gross margins.
• Higher interest rates slow down the Reshoring Revolution as manufacturers pull back on their US expansion plans in the near term.
• Valuation contraction.
  

Bryce back here in real time. TXN is now down over 10% in the three short weeks since I wrote that analysis. This is one of the few semiconductor companies building new fabs in the US and has an incredible track record of profitability (20 consecutive years of dividend increases) and tech leadership. During our research, we learned that analog semiconductors are extremely difficult to copy/rip off which is why TXN boasts gross margins of around 68%, some of the highest in the industry. We think this is a great company to own for the long term and want to slowly build up a position here.

We hope you enjoy the book and we really hope that our analysis pays off and helps us make lots of money buying the best semiconductor stocks and avoiding and/or shorting the worst of them. Please feel free to shoot us an email and let us know what you think of The Great Semiconductor Shift.

Don’t forget, we will do this week’s chat today at the regular time, 3:00pm ET in the TradingWithCody.com Chat Room or you can just email us at support@tradingwithcody.com.