Texas Instruments (TXN 1.25%) posted its first-quarter earnings report on April 26. The chipmaker's revenue rose 14% year over year to $4.91 billion, which beat analysts' estimates by $180 million. Its net income increased 26% to $2.20 billion, or $2.35 per share, which also cleared analysts' expectations by $0.18.
That earnings report was solid, but it barely moved Texas Instruments' (TI) stock, which remains down roughly 7% since the beginning of the year. Should patient investors buy this blue-chip tech stock as the bulls turn away?
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TI's growth is slowing down
Texas Instruments generated 78% of its revenue and 84% of its operating profits from analog chips during the first quarter. It manufactures these chips -- which include power and signal chain chips -- at its own foundries.
It generated 16% of its revenue and 12% of its operating profits from embedded processing chips, which serve as the "digital brains" of various devices. It outsources some of these chips to third-party foundries. The rest of its revenue and operating profits come from other types of chips.
TI's revenue grew by less than 1% in 2020 as the pandemic disrupted the automotive and industrial sectors, which brought in more than half its revenue. But in 2021, its revenue jumped 27% to $18.3 billion as those sectors recovered and its customers bought more chips again.
That's why TI's two main businesses posted accelerating growth in the first half of 2021, then gradually cooled off in the second half of the year.
|
Growth (YOY) |
Q1 2021 |
Q2 2021 |
Q3 2021 |
Q4 2021 |
Q1 2022 |
|---|---|---|---|---|---|
|
Analog |
33% |
42% |
24% |
20% |
16% |
|
Embedded |
17% |
43% |
13% |
6% |
2% |
|
Total Revenue |
29% |
41% |
22% |
19% |
14% |
Source: Texas Instruments. YOY = Year over year.
This year, TI faces tough year-over-year comparisons to that post-lockdown recovery as it slogs through the ongoing supply chain challenges and recent COVID-19 lockdowns in China.
As a result, the company expects its revenue to stay nearly flat year over year (with a midpoint forecast of $4.6 billion) in the second quarter.
But its margins are still rising
Texas Instruments faces a near-term slowdown, but its gross and operating margins have consistently expanded over the past year. Its free cash flow (FCF) margins have also comfortably remained in the 30s and 40s.
|
Period |
Q1 2021 |
Q2 2021 |
Q3 2021 |
Q4 2021 |
Q1 2022 |
|---|---|---|---|---|---|
|
Gross Margin |
65% |
67% |
68% |
69% |
70% |
|
Operating Margin |
45% |
48% |
50% |
52% |
52% |
|
FCF Margin* |
41% |
39% |
41% |
34% |
34% |
|
EPS Growth (YOY) |
51% |
39% |
43% |
26% |
26% |
Source: Texas Instruments. *Trailing 12 Months.
TI's margins are expanding because it's been transitioning its analog chips from 200mm to 300mm wafers over the past several years. That upgrade reduces the costs of its unpackaged parts by approximately 40%.
Unlike higher-end chipmakers like Qualcomm (QCOM 0.73%) and Nvidia (NVDA 3.65%), TI focuses on producing lower-end chips, which are just as essential as pricier application processors or GPUs.
That conservative strategy enables TI to operate at much higher margins than most other comparable chipmakers. By comparison, Qualcomm and Nvidia posted operating margins of 35% and 39%, respectively, in their latest quarters on a generally accepted accounting principles (GAAP) basis.
For the first quarter, TI expects its earnings per share (EPS) to also stay flat (with a midpoint forecast of $2.05) as it absorbs the incoming headwinds.
TI has weathered cyclical downturns before
TI's auto, industrial, communication, and data center markets still grew in the first quarter, but a lot of that growth was offset by its weaker sales to the consumer electronics and enterprise system markets. Those headwinds will likely persist for at least a few more quarters, and analysts expect its revenue and earnings rise 6% and 8%, respectively, for the full year.
That slowdown might seem disappointing, but TI has weathered plenty of cyclical downturns over the years while returning most of its FCF to investors through buybacks and dividends.
That's how it reduced its outstanding shares by 46% between 2004 and 2021 while raising its dividend annually for 18 straight years. It currently pays an attractive forward yield of 2.7%, which is much higher than Qualcomm's 2.2% yield and Nvidia's 0.1% yield.
TI also trades at just 18 times forward earnings. That low valuation and high yield should make it a safe stock to own as interest rates rise.
Is it the right time to buy Texas Instruments?
TI probably won't generate massive returns in the near term, but it's the type of big, boring, and reliable business that holds up well during market downturns and recessions. Simply put, TI is one of the few tech stocks I'd recommend buying hand over fist in this volatile market.
