Remarkably, despite deteriorating growth, the stock is now up more than 20% on the year, while trading at a significant premium to stronger names like Qualcomm
I'm trying to understand, why does TI deserve this level of respect when the company is being outperformed in several key areas including earnings per share, gross margin and revenue growth? In these areas, not only is TI at a meaningful disadvantage to Qualcomm, but the company also lags behind Intel
Granted, Texas Instruments still has a solid market position in the semiconductor industry and is working hard to transform its business into a leader in Analog and Embedded Processing. However, on the heels of two consecutive "sub-par" earnings performances, I do wonder how long investors are willing to wait for revenue to start moving in the right direction. In fact, I wonder if revenue really matters to this company anymore.
Saying "sub-par" was not by accident. There continues to be a disconnect between the movement of the stock and the company's actual performance. The company first-quarter report, during which revenue declined 8% year over year, serves as a perfect example.
Bulls will argue the results were in line with expectations. While this is true, it also followed a 13% decline in fourth-quarter revenue, which also followed a 2% decline in the third quarter. The pattern is anything but subtle. Nevertheless, despite this being the sixth consecutive quarter of revenue declines, investors are still coming to TI's defense.
At best, the results were mixed when looking at each segment. Analog sales were down 2% year over year and down 8% from the fourth quarter. Although there were some positives such as 4% year-over-year increase in Embedded sales, it also fell 3% sequentially. Interestingly, though, one of Texas Instruments' strongest performers came from its wireless business.
Unfortunately, the company has exited that business altogether, ceding that market to (among others) Qualcomm and Broadcom
I will concede there is now less competition in TI's core analog business, which should propel better margins in the long term. But it doesn't appear as if such robust margin leverage is imminent, given that gross margins just declined by 2.5% year over year while shedding 1% sequentially (missing the consensus). More than the revenue decline, the erosion in margin makes me question the stock's resiliency.
The quarter wasn't all bad, however. I do appreciate TXN is in a period of transition. The fact that the Analog and Embedded Processing business now comprise of 77% of the company's revenue, which is 5% higher year over year, seems to be trending in a manner that suits the company's objectives.
I'm willing to give management credit for having established a sound business model, which is producing $3 billion in free cash flow.
The question is to what extent can management propel the company further by focusing solely on analog chips? While it does appear that the cash is coming in handsomely, including a 16% year-over-year increase in the first quarter, the fact that gross margin declined does not inspire confidence. This is while operating income also declined by about 1%, missing Street estimates by almost 5%.
Bottom Line
With the stock up 20% so far on the year, I would be taking some money off the table at this level. Although Texas Instrument offers an excellent yield, shares are just too expensive. There is no way that this company should command a higher P/E than Intel, much less Qualcomm. Taking a position doesn't make much sense here.
At the time of publication the author had no position in any of the stocks mentioned.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.
