Are Texas Instruments Incorporated (NASDAQ:TXN) Investors Paying Above The Intrinsic Value?

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21-05-2025

The projected fair value for Texas Instruments is US$151 based on 2 Stage Free Cash Flow to Equity
Texas Instruments is estimated to be 25% overvalued based on current share price of US$189
The US$179 analyst price target for TXN is 18% more than our estimate of fair value
In this article we are going to estimate the intrinsic value of Texas Instruments Incorporated (NASDAQ:TXN) by taking the forecast future cash flows of the company and discounting them back to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
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We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF ($, Millions)
US$2.19b
US$6.24b
US$8.80b
US$10.1b
US$10.7b
US$11.1b
US$11.6b
US$12.0b
US$12.4b
US$12.7b
Growth Rate Estimate Source
Analyst x10
Analyst x11
Analyst x5
Analyst x2
Analyst x1
Est @ 4.35%
Est @ 3.87%
Est @ 3.53%
Est @ 3.30%
Est @ 3.13%
Present Value ($, Millions) Discounted @ 9.4%
US$2.0k
US$5.2k
US$6.7k
US$7.0k
US$6.8k
US$6.5k
US$6.2k
US$5.8k
US$5.5k
US$5.2k
("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = US$57b
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.8%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 9.4%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$13b× (1 + 2.8%) ÷ (9.4%– 2.8%) = US$197b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$197b÷ ( 1 + 9.4%)10= US$80b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$137b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$189, the company appears slightly overvalued at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Texas Instruments as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 9.4%, which is based on a levered beta of 1.537. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
See our latest analysis for Texas Instruments
Strength
Debt is well covered by earnings and cashflows.
Weakness
Earnings declined over the past year.
Dividend is low compared to the top 25% of dividend payers in the Semiconductor market.
Expensive based on P/E ratio and estimated fair value.
Opportunity
Annual revenue is forecast to grow faster than the American market.
Threat
Dividends are not covered by earnings and cashflows.
Annual earnings are forecast to grow slower than the American market.
Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. What is the reason for the share price exceeding the intrinsic value? For Texas Instruments, there are three essential elements you should further examine:
Risks: For instance, we've identified 2 warning signs for Texas Instruments (1 is a bit concerning) you should be aware of.
Future Earnings: How does TXN's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.