What happened
Shares of Texas Instruments (TXN -1.00%) were down as much as 5% after the market open before recovering. As of 12:29 p.m. ET on Wednesday, the stock was down 1.15%.
Texas Instruments beat revenue and earnings estimates for the third quarter, but the shares fell on a weak outlook for the fourth quarter. Despite weakness spreading across the chip industry, Texas Instruments has held up better than other tech stocks and is down 16% year to date.
So what
TI reported revenue growth of 13% year over year, but the top line increased by just 1% over the previous quarter. The weaker quarter-over-quarter growth reflects the slowing demand spreading from personal electronics (24% of IT's 2021 revenue) to industrial markets (41% of revenue). Personal electronics, where TI supplies chips for mobile phones and TVs, among other devices, experienced a decline in the mid-teens range.
TI's automotive business (21% of revenue) has remained strong, but analysts are concerned that after two years of growth, this important growth driver will start to weaken with the rest of the semiconductor industry.
Now what
The good news is that TI is a highly profitable business and generates more than enough free cash flow to reinvest in growth opportunities and return capital to shareholders. The stock's above-average dividend yield of 2.88% could provide somewhat of a floor underneath the stock. The high yield is likely contributing to the stock's relative outperformance this year.
TI's revenue growth may decelerate in 2023. Management's fourth-quarter guidance calls for revenue to be $4.6 billion at the midpoint, less than the Street's estimate expecting $4.95 billion. Earnings guidance also fell short of analysts' estimates, but there are catalysts to watch.
TI stands to gain investment tax credits from the CHIPS and Science Act. Management is also focused on continuing to invest in its manufacturing capabilities and markets where it can deliver long-term growth in free cash flow and returns to shareholders.
