Shares of auto and industrial chip giant Texas Instruments (TXN +1.10%) plunged doubled digits on Wednesday, falling 13.3% as of 2:22 p.m. ET.
That's a pretty big drop for what is considered a stable, blue chip company, especially after an earnings "beat" last night. However, the stock had rallied hard since April on optimism over a strong cyclical recovery in the industrial chip arena. We're talking a 50% gain between the stock's April lows and recent highs.
Therefore, when the company guided for continued growth but perhaps not as much as some had hoped for in Q3, the lack of a "perfect" recovery sent the stock tumbling.
NASDAQ: TXN
Key Data Points
Four out of five TI markets are accelerating their recovery
In the second quarter, Texas Instruments reported 16.5% revenue growth to $4.45 billion, with earnings per share rallying 15.6% to $1.44. Both figures beat analyst expectations.
However, the problem came in management's third-quarter guidance, in which the company forecasts $4.45 billion to $4.80 billion in revenue and $1.36 to $1.60 in EPS. While those figures would mark quarter-over-quarter growth, the stock had apparently been pricing in a swifter recovery.
On the conference call with analysts, management elaborated that four out of the company's five main end markets were all recovering strongly, with industrial chips up in the high teens, personal electronics up 25%, enterprise chips up 40%, and communications equipment up more than 50% year over year. However, the company's auto chip segment -- its second-largest behind industrial chips -- only grew mid-single digits, and actually fell quarter over quarter.
CEO Haviv Ilan made the point that autos had gone into its downturn in 2023, about a year later than industrial chips, and that the recovery there was shallower. Recent tariff announcements have also greatly affected the auto sector, throwing a wrench into a cyclical recovery.
Image source: Getty Images.
TI receives mixed reviews in the aftermath
Sell-side analysts had a mixed reaction to TI's earnings report and guidance, with some raising their price targets and others lowering them. The most positive was Argus, which raised its price target on the stock from $210 to $250 relative to the stock's $187 stock price as of this writing. But DZ Bank slapped a $158 price target on the stock and a "sell" rating.
TI's stock doesn't look particularly cheap on the surface at 34 times this year's earnings estimates, but TI is also making a big investment in U.S. manufacturing, which is elevating costs today. Still, that investment could prove to be a great advantage and asset over the long term.
Therefore, investors in the stock should continue to hold, while those who don't own TI may want to investigate entering the newly discounted chip giant.
Editor's note: This article has been corrected. Haviv Ilan is CEO of Texas Instruments.
