Texas Instruments' (NASDAQ:TXN) stock recently tumbled after the chipmaker posted disappointing third-quarter numbers and weak guidance for the fourth quarter. Its revenue fell 11% annually to $3.77 billion, missing estimates by $50 million and marking its fourth straight quarter of declining sales.

TI's net income fell 9% to $1.43 billion as its EPS (buoyed by buybacks) fell 6% to $1.49 but beat expectations by seven cents. However, that figure included a nine-cent tax benefit that wasn't included in TI's prior guidance, so it technically missed Wall Street's expectations.

TI expects its troubles to worsen in the fourth quarter, with a 10%-17% annual drop in revenue and a 14%-28% decline in EPS -- even after including another tax benefit. Analysts had expected TI's revenue to decline just 3% and for its earnings to improve 1%.

Those headline numbers were ugly, but investors should note that TI's growth is usually cyclical and it rewards patient investors with consistent buybacks and dividends. So should investors buy some shares of TI after its post-earnings dip?

An illustration of a semiconductor on a circuit board.

Image source: Getty Images.

The key numbers

TI produces a wide range of analog, embedded, and other chips for a wide range of industries. Most of its growth in recent years came from the automotive and industrial sectors, which offset softer demand from the consumer electronics market.

But during the third quarter, TI reported that demand from all its "major customers, regions, and technologies" declined. It mainly attributed those declines to ongoing macroeconomic challenges like the slowdown in China, the U.S.-China trade war, tariffs, and Brexit.

TI's analog revenue fell 8% annually to $2.67 billion during the quarter due to weak demand for its power, signal chain, and high volume chips. The unit's operating margin also declined from 50% to 46%.

Its embedded revenue declined 19% to $724 million due to soft demand for processors and connected micro-controllers. The unit's sales fell across all sectors, but the automotive and communications equipment markets fared the worst. Its operating margin contracted from 35% to 32%.

TI's "other" revenue fell 19% to $373 million due to weak demand for its DLP (digital light processing) chipsets and custom ASICs (application-specific integrated circuits). The division's operating margin also declined from 39% to 34%.

How long will this downturn last?

During the conference call, TI investor relations VP Dave Pahl noted that semiconductor cycles usually experience "four to five quarters of year-on-year declines before returning to positive growth." That statement indicates that TI could be approaching the end of its downward cycle:

Metric

Q3 2018

Q4 2018

Q1 2019

Q2 2019

Q3 2019

Revenue

$4.26 billion

$3.72 billion

$3.59 billion

$3.67 billion

$3.77 billion

YOY growth

4%

(1%)

(5%)

(9%)

(11%)

YOY = Year-over-year. Source: TI earnings reports.

Analysts also expect TI's revenue and earnings to rise 5% and 8%, respectively, in fiscal 2020. The chipmaker didn't offer a longer-term forecast, but it expects its industrial and automotive markets to rebound as factories buy more chips for smarter machines and automakers install more chips into connected cars.

TI will also continue moving more of its analog chips from the 200 mm manufacturing process to the 300 mm process, which cuts the unit's production costs by about 40%. That ongoing upgrade, along with rebounding sales next year, should stabilize that core business's margins.

Chips being fabricated on a wafer.

Image source: Getty Images.

TI also remains dedicated to its long-term promise of returning "all" of its free cash flow (FCF) to investors. That's why it spent 122% of its FCF on buybacks and dividends over the past 12 months, hiked its dividend for 15 straight years, and reduced its share count by 45% since 2004. Those moves should satisfy long-term investors as the company treads water and waits for the semiconductor market to grow again.

The valuations and verdict

Texas Instruments is arguably a safer semiconductor play than higher-end application chipmakers like Intel (NASDAQ:INTC) and Qualcomm (NASDAQ:QCOM), for four reasons: It's better diversified across multiple sectors, it has fewer direct competitors, its chipmaking process is less capital-intensive, and it isn't as exposed to antitrust probes.

However, those strengths are also convincing investors to pay a higher premium for TI, which trades at 21 times forward earnings. Intel and Qualcomm trade at 12 and 18 times forward earnings, respectively. TI's forward yield of 2.8% is also lower than Qualcomm's 3.3% yield, but higher than Intel's 2.4% yield.

I believe that TI is still a reliable semiconductor stock, even though its recent growth looks dismal and its valuation looks high relative to its earnings growth. It's likely approaching the nadir of the current semiconductor slump, and its business should rapidly recover as the market rebounds. Therefore, investors should consider nibbling on TI after its post-earnings drop, and consider adding more shares if it tumbles even more.