Shares of Texas Instruments (TXN -0.58%) are down about 16% after hitting a 52-week high of $334 in June, and the company's second-quarter earnings results didn't provide any lift to the stock.
Investors focused on disappointing guidance rather than the clear advantages the company has in meeting growing data center demand, setting up a compelling buying opportunity.
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Demand trends point to continued growth
Revenue grew 23% year over year, reaching $5.5 billion, while earnings per share jumped 52% to hit $2.14 in the second quarter. Those numbers are strong enough to justify the stock's forward price-to-earnings multiple of 32 at the time of writing.
Strong demand in analog and embedded processing seems to indicate a sustained recovery across the business rather than a temporary growth spurt. Industrial revenue grew 30% year over year, with broad-based demand across geographies and sectors. The company's automotive business also noted a solid mid-teens increase over the year-ago quarter.
The data center market is another reason investors should be bullish on Texas Instruments in the long term. Data center revenue doubled year over year and increased 20% over the previous quarter. CEO Haviv Ilan said, "I think there is more tailwind ahead."
What's more, Texas Instruments could generate even higher revenue, given its additional manufacturing capacity. This will allow Texas Instruments to handle short-lead-time orders that competitors may take longer to fill. This is a clear competitive advantage for the company, allowing it to continue benefiting from growing investment in artificial intelligence (AI) infrastructure.
NASDAQ: TXN
Key Data Points
Why the stock fell and is still a buy
The company's third-quarter guidance wasn't as strong as investors expected. Analysts expected third-quarter revenue guidance of $5.9 billion. Instead, management guided for revenue to be between $5.65 billion and $6.15 billion. That range leaves room for revenue to come in lower than estimates, which is why the stock is down.
The main reason for the soft revenue guidance is not demand but the impact of price increases. The company has begun raising prices, but management doesn't expect those increases to affect revenue until the fourth quarter.
The stock's sell-off appears to be driven by a focus on short-term issues rather than the company's long-term growth trajectory. Management noted that data center demand is also driving growth for the industrial business, providing a stronger tailwind than perhaps Wall Street realizes.
One reason to like the stock is its above-average dividend yield of about 2.1%. That is attractive for a top semiconductor company, with 22 consecutive years of dividend increases. The dividend is funded entirely by free cash flow, which came in at a healthy $6.5 billion on a trailing-12-month basis.
Analysts also expect earnings to grow by around 23% annually in the coming years. It's rare to find a top tech stock benefiting from the AI build-out that offers both a 2% dividend yield and high-double-digit earnings growth prospects, making Texas Instruments an interesting opportunity for investors.
