Texas Instruments' (TXN 0.05%) stock has stayed nearly flat over the past 12 months as the S&P 500 has declined 9%. The company also outperformed the benchmark Philadelphia Semiconductor Index, which slumped 15% as post-pandemic sales of new PCs and smartphones cooled off.
TI outperformed the chip sector because it was broadly diversified, it didn't have much exposure to the PC market, and it generated most of its growth from the auto and industrial sectors. Its gross margins held steady because it mainly sold analog and embedded chips, which are cheaper to produce than higher-end chips, and it consistently reduced its production costs by transitioning from 200mm to 300mm wafers (which lowered the costs of its unpackaged parts by about 40%).
Image source: Getty Images.
TI's resilient business model enabled it to generate plenty of cash for dividends and buybacks. It has raised its dividend annually for 19 consecutive years, and it's bought back nearly half its shares over the past two decades. Those strengths made TI a safe haven investment as rising interest rates drove investors away from the tech sector's pricier and more speculative stocks. But will TI's stock continue to rise and outperform the S&P 500 over the next 12 months?
Texas Instruments still faces a cyclical slowdown
TI's growth has been a bit bumpy over the past five years. It suffered its last cyclical downturn in 2019 and 2020 as it struggled with slower sales of smartphones, softer sales of automotive and industrial chips, the escalating trade war between the U.S. and China, and the COVID-19 pandemic. TI's growth subsequently accelerated in 2021 as new 5G devices arrived, the auto and industrial sectors recovered, and the market's soaring demand for new chips outstripped its available supply.
|
Metric |
2018 |
2019 |
2020 |
2021 |
2022 |
|---|---|---|---|---|---|
|
Revenue growth (YOY) |
6% |
(9%) |
1% |
27% |
9% |
|
Gross margin |
65.1% |
63.7% |
64.1% |
67.5% |
68.8% |
|
EPS growth (YOY) |
55% |
(6%) |
14% |
38% |
14% |
Data source: Texas Instruments. YOY = Year over year.
But in 2022, TI's revenue growth decelerated again throughout the first three quarters before slipping 3% year over year in the fourth quarter. It attributed that slowdown to "weaker demand in all end markets with the exception of automotive," and it expects its revenue to drop another 8% to 15% year over year in the first quarter of 2023. For the full year, analysts expect its revenue and earnings to decline 8% and 16%, respectively.
NASDAQ: TXN
Key Data Points
How long will this cyclical downturn last?
In other words, 2023 could feel a lot like 2019 for TI's investors. TI's automotive chip sales should remain broadly stable as automakers install a higher number of analog and embedded chips in their connected vehicles, but the macro headwinds could cancel out those gains by curbing its sales of industrial chips. Together, the automotive and industrial markets accounted for 65% of TI's revenues in 2022, compared to 57% of its revenues in 2019.
TI's sales of chips for personal electronics (including smartphones), communications equipment, and enterprise systems could also remain sluggish in this tough macro environment. On the bright side, TI's sales in China -- which were throttled by ongoing COVID lockdowns throughout 2022 -- could recover in 2023 as the government loosens its draconian restrictions. TI also has another advantage: Unlike producers of more advanced chips like Intel (INTC 3.85%) and Nvidia, TI doesn't face any government-mandated restrictions on selling its chips to Chinese clients.
In addition, TI could benefit from the CHIPS and Science Act, which was passed last year and grants subsidies and tax breaks to integrated device manufacturers (IDMs) that manufacture their chips domestically. That financial aid could accelerate TI's expansion of its 300mm plants and boost its long-term margins. Lastly, many chipmakers -- including the industry bellwether Taiwan Semiconductor Manufacturing (TSM +0.96%) -- expect the semiconductor market to bottom out in the first half of 2023 before recovering in the second half. That's why analysts expect TI's revenue and earnings to grow 7% and 8%, respectively, in 2024.
Where will TI's stock be in 12 months?
TI's growth should remain sluggish in the first half of 2023, but expectations for a recovery in 2024 should prevent investors from becoming too bearish. That said, TI's stock still isn't cheap at 22 times forward earnings, and its forward dividend yield of 2.9% probably won't attract any serious income investors when the 10-Year Treasury note pays a 3.5% yield.
By comparison, Intel -- which faces tougher existential challenges than TI -- trades at 18 times forward earnings and pays a much higher yield of 4.8%. Taiwan Semi trades at a forward price-to-earnings ratio of 15 and pays a forward yield of 2.5%.
TI's stock should remain stable over the next 12 months, but I expect its elevated valuation (which was buoyed by its reputation as a safe haven stock during the bear market) to limit its near-term gains. Therefore, it could stay flat or rise slightly -- but it could struggle to outperform the S&P 500 again if the bear market finally ends this year.
