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Texas Instruments Outlook Troubles Semiconductor Stocks — Buy Them Anyway

Dana Blankenhorn

Traders are running away from semiconductor stocks today, as Texas Instruments (NASDAQ:TXN) warns that demand may be ebbing. This will create an enormous opportunity for investors. TI, as it’s known, said it earned $1.57 billion — $1.58 per share — on revenue of $4.26 billion during the third quarter of its fiscal year, handing $1.8 billion back to TXN shareholders in the form of dividends and buybacks.

The numbers were well ahead of estimates, but what traders wanted to talk about was the conservative outlook of CEO Rich Templeton, who said the company was heading into a softer market, that demand was slowing. Anyone who knows trade should have expected this. American chips and designs have long crossed the Pacific to be turned into low-cost PCs and devices by Asian manufacturers for a grateful world. The Trump trade war threatens to interrupt this profitable trade.

Dumbest War Since WWI

The trade war may be the dumbest global conflict to break out since interlocking alliances started World War I, but hopefully, the damage can be contained this time.

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Besides, chip demand always ebbs and flows. It’s a cyclical business. New products become mature, and, while designers think of newer products, demand can ebb, backing up supply chains. This has been true since the industry’s birth in the 1960s. But while things readjust, there are bargains to be had.

TI’s fall of 6% in early trade Oct. 24 dropped the price-earnings (P/E) ratio of TXN stock below 22, and it’s selling at just six times its last year’s sales. Other chip stocks are also falling in price, like Analog Devices (NASDAQ:ADI), Xilinx (NASDAQ:XLNX) and Qualcomm (NASDAQ:QCOM). Taiwan Semiconductor Manufacturing Company (NASDAQ:TSM), which is now well ahead of Intel (NASDAQ:INTC) in manufacturing capability, is trading at levels not seen since July 2017.

Few stocks have been hit as hard as Micron Technology (NASDAQ:MU), now down over 40% from its May high. At under $38 per share, it is trading at just 3.3 times last year’s earnings, and at just 1.3 times its 2018 revenue of $30 billion.

That’s because past downturns hit memory chips (commodity products with little differentiation) especially hard. Micron has been driven to the wall twice by tech recessions, but it had $6 billion in cash on the books at the end of August, and this is not the first rodeo for CEO Sanjay Mehrotra, who ran Sandisk until its sale to Western Digital (NASDAQ:WDC) in 2016, after which Sandisk results began eroding.


What’s different this time for the semiconductor space? Not much. Just a supercycle in which chips start becoming standard in thousands of previously inert devices, replacing switches in thermostats and traffic lights, controlling maintenance schedules for factories and airplanes, and letting your car drive itself, among other things.

This transition in computing, from something you use overtly to something built into the background of daily life, is just getting started, amid predictable hand-wringing over security and other issues. Personally, I’m looking forward to new robot overlords, knowing they’ll be doing all sorts of rote work, allowing people to get on with the creative “wet work” we’re best at.

The Bottom Line for Semiconductor Stocks

Every ebb in chip stocks leads to an opportunity for longer-term investors. Investors should let the current chip panic wash through trader accounts, and then look to pick up some bargains. I like Micron, I like TXN stock; and if you don’t know what to get, the VanEck Vectors Semiconductor ETF (NYSEARCA:SMH) is currently trading at its low for the year. (They own a lot of TSM.)

Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this article.

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