Dallas-based Texas Instruments (NASDAQ:TXN) is expected to release earnings on April 21. Year-to-date, TXN stock is down nearly 13%. In comparison, the widely-followed PHLX Semiconductor Sector Index is down 8%.
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Given the volatility in the markets, is TXN stock a buy, hold, or sell right now? If you are not yet a shareholder you may want to analyze the group’s Q1 earnings before committing new capital into the company.
Long-term investors with a 2-3 year horizon may also consider investing in TXN stock, especially if the price falls toward $100 level. Let’s see why.
Texas Instruments and the Pandemic
The group engineers, manufactures, tests, and sells analog and embedded semiconductor chips. It serves around 100,000 global customers with more 80,000 products. In its 14 manufacturing sites worldwide, it produces tens of billions of chips each year.
As global governments try to contain the novel coronavirus outbreak, considerable disruptions to corporate and personal lives have occurred.
Texas Instruments has announced several updates as well as steps management has taken to navigate the choppy waters ahead better. A recent press release said “we began experiencing disruptions to our operations in Malaysia and the Philippines. We have been approved to operate at significantly reduced levels in these two countries.”
The group is also monitoring product demand for next several years. As the pandemic is still a highly dynamic situation, management is likely to provide further updates in the coming weeks.
When we analyze semiconductor stocks, it would be important to discuss China, too. China means both demand and supply for chip stocks. The country consumes more than 50% of all semiconductors made worldwide. Furthermore, many technology companies either have manufacturing plants in China or use Chinese companies in their supply chains.
On April 16, China announced that in Q1 its economy contracted for the first time on record. Its gross domestic product (GDP) fell 6.8% YoY. In the fourth quarter of 2019, the country had grown 6%.
Many analysts regard Texas Instruments as a bellwether for semiconductor companies. At the height of the U.S.-China trade wars in 2018 and 2019, Texas Instruments was one of the first companies to warn about the effects of the tensions on its earnings. Therefore, a contracting Chinese or possibly global economy may have adverse effects on the group’s revenue and business outlook for the rest of the year.
What to Expect from Q1 Earnings
On April 21, management’s discussion of business conditions in these unprecedented times will be as important as the actual numbers.
When it released Q4 earnings in January, investors raised eyebrows. It reported revenue of $3.35 billion, net income of $1.07 billion, and earnings per share of $1.12. The Dallas-based producer of chips saw quarterly revenue drop by 10% YoY. In Q3, there had been a similar decline as well.
The company reports revenue in three segments:
- Analog (includes Power, Signal Chain and High Volume) — contributes about 75% of revenue
- Embedded Processing (includes Connected Microcontrollers and Processors) — contributes about 19% of revenue
- Other (includes DLP® products, calculators and custom ASIC products) — contributes about 6% of revenue
The Street will pay attention to any changes in the revenue in each segment, paying special attention to Analog.
Investors may also want to know how different industries contribute to revenue:
- Industrial sector: 35%
- Personal electronics: 23%
- Automotive industry: 22%
Therefore, if we were to face a global recession, revenue may also be affected, based on the difficulty faced by each sector individually. Personal electronics and automotive sectors would likely be adversely affected in such an economic scenario.
Although the upcoming report may show short-term headwinds, it would be important to remember that its balance sheet is robust. Strong cash flow streams also mean regular dividends for long-term shareholders. The dividend yield currently stands at 3.2%. Investors love dividends, especially from tech companies.
Recent weeks have seen investors react to the COVID-19 pandemic almost on a daily basis. Stocks like TXN have had a range of ups and downs. Its 52-week range has been $135.70 (Jan. 22, 2020) – $93.08 (March 16, 2020).
Now shares are hovering around $115. I believe the next price move will in part depend on the upcoming quarterly metrics.
The Bottom Line on TXN Stock
Another earnings season is here. As investors and citizens we hope for the best. But it is also important to remain realistic. Given the question marks surrounding the effects of the pandemic on the economy, many stocks are likely to remain volatile in the coming weeks.
They may also give some of the recent gains that came after the oversold levels we witnessed earlier in March. A couple of negative health, macroeconomic or global news headlines may drive many shares down. Thus, TXN stock might also decline, providing long-term investors with a better entry point.
Finally, if you’d still like to have exposure to TXN stock but don’t want to have the full volatility that may come with it, you may instead consider investing in an exchange-traded fund (ETF). Examples of such ETFs include the iShares PHLX Semiconductor ETF (NASDAQ:SOXX), the Market Vectors Semiconductor ETF (NYSEARCA:SMH) or the the First Trust NASDAQ Technology Dividend ETF (NYSEARCA:TDIV).
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, she did not hold a position in any of the aforementioned securities.
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