Is Texas Instruments Stock a Buy Now?

Texas Instruments' (TXN 1.27%) stock price sank 5% on July 26 after the diversified chipmaker posted its second-quarter earnings report. Its revenue declined 13% year over year to $4.53 billion and beat analysts' expectations by $160 million. Its EPS dropped 24% to $1.87 but still exceeded the consensus forecast by $0.10 per share.

TI's headline numbers cleared Wall Street's low bar, but the bulls weren't impressed. Let's dig deeper and see if that post-earnings dip represents a good buying opportunity for long-term investors.

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Another quarter of falling revenue

During the second quarter, TI generated 72% of its revenue from analog chips, another 20% from embedded chips, and the remaining 8% from other products. Its analog revenue has declined year over year for three consecutive quarters, which repeatedly offset its growth in embedded sales and reduced its total revenue.

Data source: Texas Instruments. YOY = year over year.

That year-over-year slowdown was caused by macro headwinds that rattled its automotive, personal electronics, communications, and enterprise systems end markets. But like many other chipmakers, TI is focusing on its sequential growth rates as it tries to stabilize its business.

TI's revenue rose 3% sequentially in Q2 and ended its two-quarter streak of sequential declines. On the same basis, TI's automotive and personal electronics revenue increased by the low-single digits. That growth offset a mid-teens slump in its communications equipment sales and a mid-single-digit drop in its enterprise systems revenue.

For the third quarter, TI expects to generate $4.36 billion to $4.74 billion in revenue. The midpoint of that forecast ($4.55 billion) would represent a 13% decrease from a year earlier and less than 1% sequential growth from the second quarter -- but it still suggests it's finally bottoming out in this rough market for semiconductor companies. Analysts expect TI's revenue to drop 11% for the full year but rise 8% in 2024 as the cyclical downturn ends.

Its margins are still shrinking

TI's slowing revenue growth isn't surprising, but its declining gross, operating, and free cash flow (FCF) margins over the past year likely caught investors off guard.

Data source: Texas Instruments. *Trailing 12 months.

In the past, TI repeatedly claimed its ongoing transition from 200-millimeter to 300-millimeter wafers for its analog chips -- which reduced the costs of its unpackaged parts by roughly 40% -- would enable it to generate a higher gross margin than many other chipmakers. But over the past year, its slower revenue growth, higher capex related to its 300-millimeter plants, and other restructuring costs reduced its gross margin. Meanwhile, its operating expenses rose and its operating margin slipped.

All of that pressure caused TI to generate negative FCF of $47 million in the second quarter, and its trailing-12-month FCF fell 46% year over year to $3.18 billion. That's less than half of the $6.5 billion TI returned to its investors through dividends and buybacks over the past 12 months, so it might need to pause those shareholder-friendly strategies if its FCF dries up.

During the conference call, CFO Rafael Lizardi said the company's near-term revenue and FCF would experience "short-term fluctuations" as it ramped up its investments, but that spending was necessary to support its revenue growth for "the next 10 to 15 years." TI projects that elevated spending will reduce its EPS by 22%-32% year over year in the third quarter. Analysts expect its earnings to decline 22% for the full year but to grow 10% in 2024.

Is it the right time to buy Texas Instruments stock?

Based on those expectations, TI trades at 24 times forward earnings. That makes it pricier than comparable chipmakers like Broadcom and NXP, which trade at 20 and 17 times forward earnings, respectively. TI still pays a decent forward dividend yield of 2.7%, which is higher than Broadcom's yield of 2% and NXP's 1.9% yield, but that payout probably won't matter much as long as the average short-term CD yields more than 5%. 

TI is still a solid long-term investment, but it probably won't outperform the market over the next 12 months. Investors should stick with steadier blue chip tech stocks until TI's sales growth stabilizes and its margins expand again.