Texas Instruments' (TXN +1.13%) stock price slumped 4% during after-hours trading on Oct. 24 in response to the chipmaker's third-quarter report. Its revenue fell 14% year over year to $4.53 billion and missed analysts' expectations by $60 million. Its EPS also dropped 25% year over year to $1.85 but cleared the consensus forecast by three cents.
TI's slowdown wasn't surprising since the broader semiconductor market had been stuck in a cyclical downturn over the past year, but its latest report also didn't provide any clear signs of a near-term turnaround. Over the past 12 months, the Philadelphia Semiconductor Index rallied 42%, but TI's stock slipped 9%. Let's see why TI underperformed many of its peers -- and if its stock will finally head higher in a year.
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Another quarter of declining revenue for Texas Instruments
TI generated 74% of its revenue from analog chips in the third quarter. It manufactures these chips at its own first-party foundries. It generated another 20% of its revenue from its embedded processing chips, which it outsources to other foundries. Here's how those two core businesses fared over the past year.
|
Metric |
Q3 2022 |
Q4 2022 |
Q1 2023 |
Q2 2023 |
Q3 2023 |
|---|---|---|---|---|---|
|
Analog Revenue Growth (YOY) |
13% |
(5%) |
(14%) |
(18%) |
(16%) |
|
Embedded Revenue Growth (YOY) |
11% |
10% |
6% |
9% |
8% |
|
Total Revenue Growth (YOY) |
13% |
(3%) |
(11%) |
(13%) |
(14%) |
Source: Texas Instruments. YOY = Year over year.
During the third quarter, the softness of TI's industrial and communications equipment markets offset the stronger growth of its automotive, personal electronics, and enterprise systems markets. That slowdown was primarily caused by inflation, rising interest rates, and other persistent macroeconomic headwinds.
China, which accounted for about a fifth of TI's shipments in the first half of 2023, also remained a soft spot as the country's industrial sector experienced a sluggish post-pandemic recovery. On the bright side, TI's Chinese business isn't exposed to the recent export curbs on semiconductors because it only manufactures lower-end chips.
NASDAQ: TXN
Key Data Points
No clear signs of a cyclical bottom for TI just yet
TI expects its revenue to decline 9%-16% year over year in the fourth quarter, which broadly missed the consensus forecast for a 4% decline. CFO Rafael Lizardi attributed that downbeat forecast to a "weak environment" during the conference call.
That would also represent a sequential decline of 6%-13% from the third quarter, which indicates TI's business still hasn't bottomed out yet. By comparison, many other chipmakers -- including Taiwan Semiconductor Manufacturing, Micron Technologies, Intel, and Advanced Micro Devices -- grew their revenues sequentially in their latest quarters because they're more exposed to the stabilizing PC and smartphone markets.
In other words, TI's heavier exposure to the industrial market (which contributed 40% of its revenue in 2022) makes it a more macro-sensitive play than chipmakers that primarily serve the cyclical PC and smartphone markets. As a result, TI could continue to underperform many of its industry peers until the macro environment stabilizes.
TI is ramping up its spending as its growth cools off
TI has been transitioning from 200mm to 300mm wafers to reduce the costs of its unpackaged parts by roughly 40%. But over the past year, the rising costs of that expansion reduced its gross, operating, and free cash flow (FCF) margins.
|
Metric |
Q3 2022 |
Q4 2022 |
Q1 2023 |
Q2 2023 |
Q3 2023 |
|---|---|---|---|---|---|
|
Gross Margin |
69% |
66% |
65% |
64% |
62% |
|
Operating Margin |
51% |
47% |
44% |
44% |
42% |
|
FCF Margin* |
29% |
30% |
23% |
17% |
9% |
Source: Texas Instruments. *Trailing 12 Months.
During the conference call, Rafael Lizardi said TI doesn't plan to pause those investments as its revenue growth slows down because they are aimed at strengthening the company "over the next 10 to 15 years." However, the steep drop in its free cash flow is still troubling, since TI has traditionally committed itself to returning nearly all of its FCF to its investors through buybacks and dividends.
TI still bought back $848 million in shares and paid out $1.1 billion in dividends during the third quarter, but that exceeded its FCF of $1.6 billion. If that ratio stays above 100% as its gross and margins shrink, it could eventually face the difficult choice of slowing down its 300mm expansion or dialing back its buybacks and dividend hikes.
TI expects its EPS to decrease 26%-37% year over year in the fourth quarter, which also missed analysts' expectations for a milder 18% decline, as its investments continue to compress its margins.
So where will TI's stock be in a year?
Analysts expect TI's revenue and earnings to grow again in 2024 as the macro environment improves, but the company's gloomy forecast for the fourth quarter suggests that turnaround might take a bit longer than expected.
TI's stock still looks reasonably valued at 19 times forward earnings and it pays a decent forward yield of 3.5%, but it simply isn't as appealing as other chipmakers that have reached their cyclical troughs. I believe TI's valuation and yield should limit its downside potential over the next 12 months -- but it will also likely underperform most of its PC and smartphone-oriented peers in the semiconductor market.
