With Analog Market Seeing A Lull, What To Expect From Texas Instruments Q2 Earnings?

Texas Instruments (NASDAQ:TXN) is poised to report its Q2 results next week. We expect the company’s revenues for the quarter to decline by about 15% year-over-year to $3.84 billion, slightly ahead of estimates, while earnings are likely to come in at about $1.17 per share, roughly in line with estimates. While the broader semiconductor industry has seen a recovery from a cyclical downturn in recent quarters led by the surge in demand for artificial intelligence chips and a recovery in the personal computer market, Texas Instruments has been witnessing some headwinds as major customers scale back on purchases. See our analysis of Texas Instruments Earnings Preview for a closer look at what to expect when the company publishes Q2 results.

Over Q1, sales declined by about 16% year-over-year to $3.66 billion, while earnings came in at $1.10 per share, weighed down by weaker sales of both analog semiconductors and embedded products. The company’s product lineup – which includes analog semiconductors and embedded systems – is seen to be more dependent on macroeconomic factors, compared to other parts of the semiconductor industry. On the automotive front, customers have been working through their existing inventory levels after stocking up following the Covid-19 supply crunch. Moreover, the company also makes a host of products for industrial customers including analog products, such as amplifiers and power management devices, as well as processors and microcontrollers specifically designed for industrial automation, and this segment saw revenue decline in the high single-digits over the last quarter. Customers in the communications equipment sector have also scaled back a bit on their purchases, with sales declining 25% as the pace of 5G deployment cools off, particularly in the U.S. Texas Instruments margins have also faced pressure, with gross margin contracting 320 basis points to 66.1% over the last quarter. Margins are also being impacted by the smaller revenue base as well as slightly higher production costs associated with reduced factory loadings.

TXN stock has shown strong gains of 25% from levels of $165 in early January 2021 to around $205 now, vs. an increase of about 50% for the S&P 500 over this roughly 3-year period. However, the increase in TXN stock has been far from consistent. Returns for the stock were 15% in 2021, -12% in 2022, and 3% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that TXN underperformed the S&P in 2021 and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including AAPL, MSFT, and NVDA, and even for the mega-cap stars GOOG, TSLA, and AMZN.

In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could TXN face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

There are some positives for Texas Instruments. Semiconductor content is expected to grow steadily in the coming years in the industrial sector, as automation of productions gathers pace and labor costs continue to rise. The automotive sector is also expected to see strong growth in semiconductor content, driven by connected and self-driving vehicles.  The Industrial and automotive sectors together accounted for about 75% of TI revenue in 2023 and the two end markets have expanded at an annual rate of 10% since 2013. This trend could continue going forward as well.  The company also invested considerably to expand its 300mm wafer fabrication capacity in the U.S. This helps reduce geopolitical risks, while also improving efficiency and long-term competitiveness. Moreover, Activist investor Elliott recently took a $2.5 billion position in the company and has been pushing the company to better manage its capital spending and boost free cash flows to a target of $9 per share by 2026. This could also provide an upside for the stock.  We value Texas Instruments at about $175 per share, which is below the current market price of $207. We will be updating our price estimate post Q2 results. See our analysis of Texas Instruments Valuation: Expensive or Cheap for a closer look at what’s driving our price estimate for Texas Instruments.

[1] Returns as of 7/17/2024
[2] Cumulative total returns since the end of 2016

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