Texas Instruments Earnings: Result Left More to Be Desired; Maintain $168 Fair Value Estimate

Wide-moat Texas Instruments TXN reported predictably soft second-quarter results in line with expectations, but provided investors with a disappointing third-quarter outlook. We were discouraged by the report and earnings call, as TI’s revenue growth is lagging its peers, gross margins are deteriorating, inventory continues to rise, and we didn’t hear the strongest answers on how TI can turn the tide. We attribute TI’s underperformance mostly to its exposure to soft end markets such as personal electronics and communications equipment. We still view TI as a wide-moat firm with exemplary capital allocation policies, but recognize that investors have more reasons to question the company’s strategic steps than what we would have imagined a couple of years ago. Still, we maintain our $168 fair value estimate as our aforementioned concerns are minor for such a stout business. We view shares as slightly overvalued.

Revenue in the June quarter was $4.53 billion, down 13% year over year but up 3.5% sequentially and at the high end of guidance of $4.17 billion-$4.53 billion. TI saw soft business conditions in all end markets except automotive, which grew a low-single-digit percentage sequentially and, per our calculations, was up close to 25% year over year. On the downside, however, we calculate that personal electronics, communications equipment, and enterprise systems revenue, which made up 33% of revenue in 2022, were each down close to 40% or more year over year. Lower sales levels caused gross margin to dip 120 basis points sequentially and 540 basis points year over year to 64.2%. Inventory remains a concern, up to $3.7 billion or 210 days.

Revenue in the September quarter is expected to be $4.36 billion-$4.74 billion, which, at the midpoint of guidance, would be $4.55 billion, flat sequentially and down 13% year over year. We calculate that EPS guidance, at the midpoint of $1.80, implies further gross margin deterioration to the 63% range.