On Tuesday and Wednesday, leading chipmakers Texas Instruments (TXN -0.41%) and Qualcomm (QCOM 0.09%) reported earnings, providing more evidence the purported chip slowdown remains better than feared.
Texas Instruments makes analog and embedded chips that go into a wide variety of devices, while Qualcomm is the largest provider of modems for mobile devices. Given the high amount of consternation across the analyst community about a slowdown in consumer technology spending, lots of chip investors were likely wondering whether these bellwethers would show the first cracks in the semiconductor market.
While there were a few wrinkles in each report, each beat expectations, and it appears there's still strong demand for semiconductors out there thanks to growing content per device.
Texas Instruments guides down, but for an understandable reason
Texas Instruments beat both revenue and earnings estimates for the quarter, with revenue surging 14% and earnings per share rising 26%. However, the stock initially fell in after-hours trading Tuesday as the company's outlook for next quarter was for between $4.2 billion and $4.8 billion, sequentially down from the first quarter's $4.91 billion and below consensus estimates of $4.73 billion.
Yet while Texas Instruments initially fell on the news, it rebounded higher to finish the next day in positive territory. That's likely because investors digested the earnings transcript, which gave a reason for the guide down: lockdowns in China, not declining demand.
According to CFO Rafael R. Lizardi, Texas Instruments took a blunt 10% cut to its revenue forecast, based on the ongoing lockdowns throughout China: "We're seeing cases where factories are shut down, and they just will not accept -- they cannot accept deliveries. In other cases, the freight forwarders will not take our parts from our distribution centers to ship them to the factories in China, particularly in the Shanghai area, because those are shut down."
Nevertheless, when asked whether this could lead to demand destruction, Lizardi said: "Customers' behavior wasn't changing as it related to backlog or cancellations. In fact, we continued to see expedites for deliveries."
"Where their operations are being impacted, they would still like that product," Head of Investor Relations Dave Pahl added. "And so they are not canceling those orders. They would still like to be in line and get that product as soon as they can take it."
Without the 10% haircut, guidance would have been for between $4.7 billion and $5.3 billion, which would be considerably stronger, up sequentially from the first quarter and above consensus.
It's not surprising that TI is seeing strong demand. The company has concentrated its investments in the industrial and automotive chip verticals. While consumer devices may be seeing a slowdown -- and there's a debate about that, at this point -- the auto market is known to be seeing continuing shortages and strong demand due to higher chip content per vehicle. Meanwhile, businesses continue to invest in automation and the Internet of Things (IoT). That makes sense, given widespread labor shortages and wage inflation.
So after the initial knee-jerk negative reaction, it looks as though TI's results and outlook were pretty good after all.
Qualcomm eases (some) concern about smartphones
While Texas Instruments was notably conservative in its guidance, Qualcomm was not. Or if it was, its momentum was really, really impressive. The company trounced revenue and earnings expectations, growing revenue 41% and earnings per share a whopping 68%. Guidance came in strong as well, as management projected 35.2% revenue growth and 35% non-GAAP (adjusted) EPS growth at the respective midpoints this quarter.
Qualcomm is impressively growing its radio frequency, IoT, and automotive segments, but its handset chip segment was strong, too, up 56%. While it is true that this mostly reflects the pricing increase associated with higher-end 5G phones, there still appears to be healthy growth in the premium tier of the market, where Qualcomm has been focusing. That being said, management acknowledged a slowdown in the lower end of the market in China.
Qualcomm nicely highlights the disconnect going on between the strong semiconductor market and the investing community, which is fretting about lower demand. Qualcomm seemed to confirm that even if units are flat or decline slightly in a slowdown, semiconductor content per box is going up not only in phones, but everywhere across the technology sector.
Chief Financial Officer Akash Palkhiwala highlighted this on the conference call:
The thing to remember is only 20% of the global handset units come from China, right? So the rest of the market, you're still seeing strong demand at premium high tier. And so we've been able to participate in that. And then finally, from a content perspective, as you know well, when you look at one generation to the next of phones, the amount of computing that consumers are demanding keeps going up. And that provides an opportunity for us, not just from a competitive differentiation perspective but also additional content per phone.
It's starting to add up
Last week, investors heard from some of the bigger semiconductor manufacturers and equipment makers, which highlighted strong industry growth and demand for production equipment still well above available supply. Now, Texas Instruments and Qualcomm seem to confirm the trend. While certain pockets of the tech world may see slowing units, the semiconductor content per box is going up so much that it's leading to generally strong growth.
As chip intensity rises in consumer devices, it could help the industry defy economic weakness. For investors, if semiconductors are no longer deemed as cyclical as they once were, they could see a rerating higher. Or at least, their valuations may not sink as much as anticipated if rates rise and the economy goes into a downturn.
It's hard to say when these stocks will bottom, but many look extremely cheap for companies putting up consistent growth.