Morningstar | TI Gets the Call for 5G Products Despite the Chip Industry Slowdown; Maintains $106 FVE
Texas Instruments reported solid first-quarter results in light of soft broad-based demand for semiconductors, and although the company's second-quarter forecast was slightly below our prior expectations, we still believe TI is a best-in-breed analog chip leader that should have no problem weathering the latest chip industry downturn. We will maintain our $106 fair value estimate for wide-moat TI. With TI's shares up significantly year-to-date, we now view shares as modestly overvalued.TI's revenue in the March quarter was $3.59 billion, down 5% year over year and down 3% sequentially, but near the high point of the firm's prior forecast of $3.34 billion-$3.62 billion as announced in January. Analog chip sales for communications equipment was the bright spot, up about 30% year over year per management, owing to demand for 5G network infrastructure expansion and also an easy comparison because of a pause in 4G spending in the prior year. The firm's most important end markets, industrial and automotive, each saw revenue down a mid-single-digit percentage year over year. Lower sales levels caused gross margins to dip about two percentage points sequentially to 63%.
For the June quarter, TI expects revenue in the range of $3.46 billion-$3.74 billion which, at the midpoint of $3.60 billion, is a 10% year-over-year decline and flat sequential sales. The forecast is slightly below consensus estimates and is relatively disappointing, considering the firm's typical seasonal rise in sales during the second quarter. TI did not call for an end to the latest chip downturn, but did say that most historical slumps last four to five quarters, which would place the June quarter toward the end of a "normal" cycle. Regardless of the timing of a rebound, we think a recovery is fairly inevitable, given strong secular trends associated with rising chip content in cars and a variety of industrial equipment.
We continue to assign TI an exemplary stewardship rating and again, fully expect the firm to properly navigate through this latest industry cycle. The latest measures include a reduction in factory loadings, prudent spending on operating expenses and continuing to build inventory only for the longest-life industrial products. Meanwhile, we expect TI to continue to invest internally in research and development, and manufacturing capacity in order to remain in a strong competitive position in future.
Texas Instruments designs and makes semiconductors that it sells to electronics designers and manufacturers. The company has two reportable segments: Analog and Embedded Processing. The company's analog semiconductors change signals, such as sound, temperature, pressure or images to a stream of digital data. The company's analog segment primary product lines includes: power, signal chain, and high volume. The company's embedded processors are designed to handle specific tasks and can be optimized for various combinations of performance, power and cost, depending on the application. The company's embedded processing segment primary product lines includes: connected microcontrollers and processors.
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