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Did Texas Instruments' Earnings Just Spell Doom for Chip Stocks?
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Semiconductor stocks have struggled this year as Wall Street warned of an impending cyclical slowdown in the industry, and on Tuesday afternoon, chip bellwether Texas Instruments (TXN - Free Report) looks to have confirmed those fears in its latest earnings announcement.
Shares of Texas Instruments were down more than 5% in early morning trading after the company’s report and call, even though its most recent quarter exceeded expectations on the bottom line. Adjusted earnings came in at $1.58 per share, topping consensus estimates by five cents.
The firm’s quarterly revenue was the first sign of concern, as total sales of $4.26 billion missed consensus estimates by nearly 1%. Still, Texas Instruments did record year-over-year revenue growth of 3.4%.
But the fears of an industry slowdown were really confirmed by management’s comments. Chief Executive Rich Templeton, for example, said that “demand for our products slowed across most markets.”
And management was not willing to concede that this was simply a one-off issue. The company’s guidance was lower than expected, and commentary in the conference call was tepid.
“We’re heading into a softer market, and we plan to execute as we have in the past,” said Rafael Lizardi, Texas Instruments’ chief financial officer. Lizardi added that the company is planning to display discipline with its operations and limits its number of wafer starts.
Lizardi also raised concerns about the entire chip industry, saying, “We believe this is mostly driven by a slowdown in semiconductors, meaning we really can’t speak to any macro-driven event.”
Semiconductor companies have been red hot in recent years thanks to a number of key growth catalysts, including cloud computing, artificial intelligence, the Internet of Things, and the evolution of smartphones.
Nevertheless, the semiconductor industry has proven to be a cyclical one in the past, and investors have grown concerned that this cycle is nearing its end. Just as the rise of PCs and the first wave of smartphones created a boom and eventual pullback, so too—the theory goes—could the growth trends we have seen recently.
As we can see, both Texas Instruments and its industry peers have underperformed the S&P 500 this year:
Other recent earnings reports in the industry have also been disappointing. For example, MKS Instruments (MKSI - Free Report) , which supplies testing equipment to semiconductor manufacturers, said Tuesday that its sales to these businesses fell about 8% on a year-over-year basis.
One issue that tends to predict cyclical drawbacks is oversupply. This can be caused by excessive manufacturing, sluggish demand, or a combination of both. Analysts have warned in recent weeks that oversupply is far greater now than it was during the last pullback.
There is still hope, however, that the aforementioned growth trends will continue to expand at a rate that would limit the effects of a fresh pullback. After all, if the number of connected devices worldwide is set to continue expanding rapidly, and if we are on the brink of an AI and autonomous driving revolution, demand should keep up over time. Texas Instruments is apparently preparing for both outcomes.
“Where it goes from there and how long it lasts are just things that we don’t know,” said the company’s director of investor relations, David Pahl. “We’ll be in a position with what we’re doing with wafer starts that if it’s a more shallow correction, we’ll be prepared to support it on the other side. If it’s longer-lived, we will be monitoring our wafer starts on a daily basis and we know how to react in those situations.”
Other notable chip stocks slipping on TXN’s report include AMD (AMD - Free Report) , down nearly 5%; Nvidia (NVDA - Free Report) , down more than 3%; and Micron (MU - Free Report) , down almost 4%.
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Image: Bigstock
Did Texas Instruments' Earnings Just Spell Doom for Chip Stocks?
Semiconductor stocks have struggled this year as Wall Street warned of an impending cyclical slowdown in the industry, and on Tuesday afternoon, chip bellwether Texas Instruments (TXN - Free Report) looks to have confirmed those fears in its latest earnings announcement.
Shares of Texas Instruments were down more than 5% in early morning trading after the company’s report and call, even though its most recent quarter exceeded expectations on the bottom line. Adjusted earnings came in at $1.58 per share, topping consensus estimates by five cents.
The firm’s quarterly revenue was the first sign of concern, as total sales of $4.26 billion missed consensus estimates by nearly 1%. Still, Texas Instruments did record year-over-year revenue growth of 3.4%.
But the fears of an industry slowdown were really confirmed by management’s comments. Chief Executive Rich Templeton, for example, said that “demand for our products slowed across most markets.”
And management was not willing to concede that this was simply a one-off issue. The company’s guidance was lower than expected, and commentary in the conference call was tepid.
“We’re heading into a softer market, and we plan to execute as we have in the past,” said Rafael Lizardi, Texas Instruments’ chief financial officer. Lizardi added that the company is planning to display discipline with its operations and limits its number of wafer starts.
Lizardi also raised concerns about the entire chip industry, saying, “We believe this is mostly driven by a slowdown in semiconductors, meaning we really can’t speak to any macro-driven event.”
Semiconductor companies have been red hot in recent years thanks to a number of key growth catalysts, including cloud computing, artificial intelligence, the Internet of Things, and the evolution of smartphones.
Nevertheless, the semiconductor industry has proven to be a cyclical one in the past, and investors have grown concerned that this cycle is nearing its end. Just as the rise of PCs and the first wave of smartphones created a boom and eventual pullback, so too—the theory goes—could the growth trends we have seen recently.
As we can see, both Texas Instruments and its industry peers have underperformed the S&P 500 this year:
Other recent earnings reports in the industry have also been disappointing. For example, MKS Instruments (MKSI - Free Report) , which supplies testing equipment to semiconductor manufacturers, said Tuesday that its sales to these businesses fell about 8% on a year-over-year basis.
One issue that tends to predict cyclical drawbacks is oversupply. This can be caused by excessive manufacturing, sluggish demand, or a combination of both. Analysts have warned in recent weeks that oversupply is far greater now than it was during the last pullback.
There is still hope, however, that the aforementioned growth trends will continue to expand at a rate that would limit the effects of a fresh pullback. After all, if the number of connected devices worldwide is set to continue expanding rapidly, and if we are on the brink of an AI and autonomous driving revolution, demand should keep up over time. Texas Instruments is apparently preparing for both outcomes.
“Where it goes from there and how long it lasts are just things that we don’t know,” said the company’s director of investor relations, David Pahl. “We’ll be in a position with what we’re doing with wafer starts that if it’s a more shallow correction, we’ll be prepared to support it on the other side. If it’s longer-lived, we will be monitoring our wafer starts on a daily basis and we know how to react in those situations.”
Other notable chip stocks slipping on TXN’s report include AMD (AMD - Free Report) , down nearly 5%; Nvidia (NVDA - Free Report) , down more than 3%; and Micron (MU - Free Report) , down almost 4%.
Will You Make a Fortune on the Shift to Electric Cars?
Here's another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.
With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.
It's not the one you think.
See This Ticker Free >>