What happened
Shares of semiconductor all-stars Texas Instruments (TXN 5.64%), Nvidia (NVDA -3.33%), and Advanced Micro Devices (AMD -0.35%) were rising today, up 5%, 4.8%, and 3.1%, respectively, as of 12:55 p.m. ET.
Texas Instruments reported earnings last night, and handily beat analyst expectations. Although Texas Instruments mostly makes different kinds of chips than Nvidia or AMD, healthier-than-feared demand signals from TI were likely a positive for the whole sector.
Big tech earnings from Microsoft and Alphabet last night also came in better than feared, at least with regard to their cloud computing units. Thus, Nvidia and AMD, which have large data center businesses, were likely reacting positively to that as well.
So what
In the second quarter, Texas Instruments delivered 13.8% revenue growth to $5.21 billion, and earnings per share of $2.45. Both figures were far ahead of analyst estimates. The huge beat was partly due to management's tepid guidance on the prior earnings call, when it said lockdowns in China were hurting deliveries; however, it appears TI was able to ship all it wanted in the quarter after China lifted the lockdowns in Shanghai in late May and June. Management's prior guidance had taken a $500 million haircut, but the company beat revenue estimates by $560 million.
TI also guided ahead of street estimates, with a revenue range between $4.9 billion and $5.3 billion, and EPS between $2.23 and $2.51 for the current quarter.
Texas Instruments is a good chipmaker to track as it serves a lot of different end markets. While many investors are clearly nervous about a recession, TI's management noted pretty healthy growth across most sectors, except for personal electronics, which only grew in the low single-digits. Meanwhile, industrial chips were up by high single-digits, auto chips were up more than 20%, communications chips were up 25%, and enterprise system chips were up by mid-teen percentages.
Fortunately for TI investors, it has a high concentration in industrial and auto chips, which made up more than 60% of revenue, combined, last year. With the auto sector still appearing undersupplied, TI should benefit, even if PCs and phones go into a downturn.
The PC hangover that occurred after most of the pandemic-related lockdowns ended in the U.S. has caused the stocks of Nvidia and AMD to sell off hard this year; however, the other half of their businesses is in the data center. Fortunately, TI's enterprise systems number came in strong last night, and both Microsoft's Azure and Alphabet's Google Cloud Platform reported strong growth last night as well.
Azure was up 40%, or 46% in constant currency, and management also noted strong bookings growth of 25% and 35% in constant currency, backed by large $100-million-plus deals. Meanwhile, Alphabet's search revenue came in better than expected, while its cloud platform grew 36% even after a negative currency hit. Management also noted despite macroeconomic problems, it would continue to invest in strategic growth areas of cloud and artificial intelligence, given how big those opportunities are.
That certainly seems as though cloud and enterprise data center spending should hold up relatively well this year, despite fears over a slowdown. Given Nvidia and AMD's exposure to the data center, the big tech earnings reports are also likely helping their shares today.
Now what
While high-priced software stocks get a lot of the attention from technology investors, the semiconductor sector also offers attractive above-market growth, thanks to ongoing digital transformation across a host of industries.
Of course, chips revenue and earnings are more uneven than those of recurring software subscriptions, but in general, semiconductor stocks are much cheaper, with the ability to pay shareholders via dividends and/or share repurchases.
During this market downturn, which has severely punished semiconductor stocks, look for resilient names with exposure to the right end markets, such as data centers and autos. They could make for outstanding long-term buys.
