Texas Instruments Readies for Q3 Earnings Amid Industry Challenges

Texas Instruments (NASDAQ:TXN) is set to announce its Q3 results shortly. Analysts project a year-over-year revenue decline of approximately 10%, landing at $4.14 billion, which slightly surpasses expectations. In terms of earnings, estimates suggest the company will post $1.38 per share, roughly in line with predictions. Although the semiconductor industry has recently rebounded—driven by a surge in demand for artificial intelligence chips and some recovery in the personal computer market—Texas Instruments is facing challenges as key customers reduce orders. For a more detailed overview, read our analysis of Texas Instruments Earnings Preview, highlighting what to watch for in the upcoming Q3 announcement.

In Q2, Texas Instruments experienced a 16% revenue drop compared to the previous year, reporting $3.82 billion in sales, with earnings at $1.22 per share. The company’s focus on analog semiconductors and embedded systems makes it more sensitive to macroeconomic changes than many rivals in the semiconductor sector. Notably, in the automotive market, many clients are cutting down on inventory that had built up due to pandemic-related supply chain disruptions. Additionally, the industrial segment—comprising products like amplifiers and specialized processors—is also showing signs of weakness. Purchases in the communications equipment sector have decreased as well, influenced by a slowdown in 5G network implementation, particularly in the U.S. Furthermore, Texas Instruments’ profitability has taken a hit, with its gross margin shrinking nearly 600 basis points to 58% in the last quarter due to reduced revenue and higher production costs stemming from lower factory utilization.

The performance of TXN stock has varied over the last four years. Notably, its annual returns have been less volatile than those of the S&P 500. In 2021, the stock climbed 18%, but fell by 10% in 2022, and managed a 6% increase in 2023. In comparison, the Trefis High Quality (HQ) Portfolio, which contains 30 stocks, has delivered more consistent performance, outperforming the S&P 500 every year during the same timeframe. This raises a pivotal question: As uncertainty looms amid rate fluctuations and ongoing geopolitical tensions, could Texas Instruments replicate its previous performances and again lag behind the S&P over the next twelve months? Or will it mark a significant recovery?

Despite the challenges, there are some encouraging signs for Texas Instruments. The demand for semiconductors is projected to steadily grow in the industrial sector, driven by increasing production automation and rising labor costs. Furthermore, the automotive industry is expected to expand significantly, especially with the advent of connected and self-driving vehicles. In 2023, the industrial and automotive sectors represented about 75% of Texas Instruments’ revenue; since 2013, these markets have been growing at an annual rate of around 10%, a trend likely to continue.

To enhance its competitive edge, Texas Instruments has heavily invested in expanding its 300mm wafer fabrication capacity in the U.S. This not only mitigates geopolitical risks but also bolsters production efficiency. The company also plans to lessen its capital expenditure after a previous aggressive strategy, having invested $5.1 billion last year and now budgeting around $5 billion for 2024 and 2025. Texas Instruments has revised its long-term capital spending forecast for 2026, reducing it to a range of $2 to $5 billion.

Additionally, the company forecasts a notable increase in free cash flow, estimating $8 to $12 per share by 2026, significantly above consensus estimates and rising from approximately $6.50 per share in 2022. This positive shift is influenced by activist investor Elliott, which took a $2.5 billion stake in the company and advocated for improved cash flow management. Our current valuation for Texas Instruments stands at about $198 per share, closely aligned with its present market price of $201. We will update our price estimate following the Q3 results. For a deeper understanding of the factors influencing our price estimate, explore our analysis of Texas Instruments Valuation: Expensive or Cheap.

[1] Returns as of 10/17/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.