The stock market has an uncanny way of forcing you to second-guess your own convictions. For as much as I've pounded the pavement last year demanding a higher premium on Texas Instruments (NASDAQ:TXN), with shares now trading a new 52-week highs, I'm wondering if it's deserved.
Although this company still has a solid market position, I worry that Texas Instruments' lack of "mobility" will impede its long-term growth potential. And with prolonged struggles in execution such as fallen orders and high inventories, this doesn't make TI a compelling stock to hold. But the Street sees it another way, as shares have soared more than 25% in three months.
Granted, this is a company with a solid financial position with reasonable debt. I would also credit management for having posted decent cash flow and expanding profit margins. However, on the heels of another subpar earnings report, it is also clear that Texas Instruments has some glaring weaknesses. And investors are dismissing these as quick fixes, which they are not.
Not much was expected, little delivered
This has been a recurring theme for Texas Instruments. The fourth quarter saw revenue of $2.98 billion, which was down 12% sequentially and 13% year over year. This marked the fifth consecutive quarter of declining revenue. Likewise, earnings fell 11% year over year to $264 million, while operating profit plummeted 62%.
Meanwhile, rivals such as Qualcomm (NASDAQ:QCOM) continue to operate on all cylinders. In the comparable quarter, Qualcomm posted revenue of $6.02 billion. This represented growth of almost 30% year over year and 24% sequentially. Earnings per share were equally impressive, advancing 35% year over year and by almost 50% sequentially.
Chip revenue soared 34%. This is despite there being no change in shipments and ASPs, or average selling prices. Meanwhile, Texas Instruments have cited weak demand for its revenue decline. However, for Qualcomm, it's not just about chip sales. That gross margin advanced by twenty basis points, meaning that the company has been making more money on each sale, which spurred a 36% increase in net income.
In that regard, Texas Instruments is also being outperformed by Intel (NASDAQ:INTC). Although the two have been put in the same basket for their mobile device irrelevance, Intel was at least able to post revenue that arrived at the midpoint of its own guidance. This is even though it missed Street estimates by less than 1%. Then again, Intel beat on earnings per share by $0.03.
Conversely, Texas Instruments posted earnings per share of $0.23, down from $0.25 a year ago. This includes several one-time charges and the numbers were still good enough to exceed Street estimates, but it also points to how low expectations were. On the other hand, Qualcomm has beaten the high end of its projections by double-digit percentage points.
Can the company ever stop the bleeding?
So essentially, Qualcomm is outperforming Texas Instruments, which posted revenue declines in all business segments. And the company didn't exactly reassure investors that things were going to get better. CEO Rich Templeton described it this way: "Our visibility into future demand remains limited as our lead times are short and our customers are reluctant to commit to extended backlog."
This is disappointing coming from a company with such a strong brand. Plus, that customers are reluctant to spend is not reflective of a broad sector issue. This was not evident according to Qualcomm's report. Nor was it felt by Broadcom (NASDAQ: BRCM), which just posted 14% increase in revenue and $251 million in net income. Both figures topped analysts' estimates.
While Broadcom's strong performance supports the premium investors are paying for the stock, why are shares of Texas Instruments trading at a P/E of 22.45, whereas Qualcomm's is 17.71? For that matter, that these shares are trading at double the P/E ratio of Intel is too much of a wager by investors. Especially since Texas Instruments just issued revenue guidance that represents 6% sequential decline, arriving well below Street estimates.
As rivals are ramping up product portfolios and positioning for a market recovery, Texas Instruments is stuck figuring out ways to reverse its revenue slide, which has now spanned five quarters. And thus far, the company has not shown that it can stop the bleeding. Unlike Broadcom and Qualcomm, Texas Instruments does not have the strong relationship with device manufacturers such as Apple and Samsung. This means the bleeding is likely to continue.
Still scratching my head
The relationships with Apple and Samsung means that Broadcom and Qualcomm enjoy a combined 50% exposure to the smartphone market. This is even though mobile devices only represent a portion of their respective revenue. Plus, Intel is beginning to gain ground in this area. Although this has been a popular cited bear argument against Intel, that's not so much the case anymore.
The company has spent 14% more in research and development helping to shore up its mobile position. As a result, Intel is expected to unveil LTE-compatible chips later in the year. These chips will allow the company to power more smartphones and seek more growth opportunities in tablets, whereas Texas Instruments has had no such plans.
For these shares to make sense in the long term, I think Texas Instruments needs to be more "instrumental" in mobile. In the meantime, while I do believe that Texas Instruments deserves the benefit of the doubt, I'm nonetheless amazed by its price. If these shares were at least trading on par with Qualcomm, it would not be as big of a deal. All things being equal, the stock is overvalued by 15%. That it still carries this level of premium is a head-scratcher.