Texas Instruments Q4 Forecast Suggests Demand in Most End Markets Has Peaked

Texas Instruments Stock at a Glance

• Current Morningstar Fair Value Estimate: $158
• Texas Instruments Stock Star Rating: 3 Stars
• Economic Moat Rating: Wide
• Moat Trend Rating: Stable

Texas Instruments Earnings Update

Texas Instruments (TXN) reported solid third-quarter results but provided investors with a downbeat fourth-quarter forecast. We trim our fair value estimate for wide-moat TI down to $158 from $166, and despite shares falling about 6% after hours to the $153 range, we continue to view TI’s shares as fairly valued.

Sluggish demand for chips going into personal electronics devices like PCs was well known, but we’re troubled by the weakness that TI is seeing within industrial, its largest end market. The chip shortage is effectively over in this end market, as TI saw customer cancellations and further weakness ahead; we would attribute such softness to macroeconomic factors. Automotive chip demand still exceeds supply, but industrial demand also used to be more than supply in prior quarters; but we now see a decoupling of these end markets.

Revenue in the September quarter was $5.24 billion, up 1% sequentially, up 13% year over year, and toward the high end of guidance of $4.90 billion-$5.30 billion. Automotive sales were the bright spot, up about 10% sequentially. Disappointingly, industrial revenue was flattish sequentially. Predictably, personal electronics revenue fell about 15% sequentially with soft demand for PCs and similar gadgets. Gross margin dipped 60 basis points sequentially (albeit off of peak levels) to 69.0%. TI still generated a stellar 51% operating margin.

For the December quarter, TI expects revenue to fall to the range of $4.40 billion-$4.80 billion. At the midpoint, sales would be down 5% year over year and 12% sequentially, although the fourth quarter often sees a normal seasonal dip in revenue. We estimate that TI’s guidance midpoint of $1.97 of EPS implies a further dip in gross margin to the 66%-67% range and operating margins down to the 47% range. Such results would still be spectacular when compared to historical levels, but they would indicate that business conditions have already peaked.