Texas Instruments: A Top Tech in Chips?

06/14/2019 5:00 am EST

Focus: TECHNOLOGY

James Pearce

Director of Research, Investing Daily

The current trade war tensions with China creates a rare buying opportunity for high-quality tech stocks with excellent long-term growth prospects, observes Jim Pearce, growth stock expert and senior editor of Investing Daily's Personal Finance.

Semiconductor maker Texas Instruments (TXN) is heavily investing in 5G which President Trump has identified as a priority in maintaining America’s edge in information technology.

Trump has also indicated that he intends to invest revenue from the new trade tariffs into building out infrastructure at home, including 5G. Unlike 4G, which was primarily intended to improve consumer technology products such as smartphones, 5G will enable business applications to work considerably faster and cheaper.

That means manufacturing costs will come down, allowing American producers of goods to compete more effectively with overseas rivals.

Trump declared a national emergency over foreign threats to American technology. At the same time, he effectively blocked Chinese telecom giant Huawei from expanding its 5G presence in the United States by requiring government approval for a U.S. company to do business with Huawei.

The obvious winners from that move, such as PF Income Portfolio holdings AT&T (T) and Verizon Communications (VZ), saw their share prices spike in the days following that announcement. Both companies have invested heavily in 5G technology over the past two years.

Texas Instruments has also spent a lot of money on 5G recently, spending $1.5 billion in R&D last year to develop new products. However, that type of spending gets considerably less attention than the splashy M&A transactions made by AT&T and Verizon. Also, the “down-the-line” beneficiaries of increased 5G spending are less apparent than its distributors.

I don’t think that will go on much longer. As more money (and attention) is spent on the buildout of the domestic 5G market, the suite of IoT (internet of things) products being developed by Texas Instruments should cause analysts to revise its future revenue stream considerably higher.

It won’t happen overnight, and it may not happen until next year if Trump is unable to get a spending bill through Congress until a truce with China is called first. But it will happen eventually, and when it does I expect TXN to be one of the primary beneficiaries.

In the meantime, you’ll collect a forward dividend yield of 3% that is likely to be raised just as it has every year for the past fifteen years. Texas Instruments is a buy up to $110.

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