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Morningstar | TI's Wide Moat Continues to Aid the Firm Through the Current Chip Downturn; Maintaining $106 FVE

Texas Instruments reported second-quarter results that were less gloomy than anticipated, given sluggish broad-based demand for semiconductors and U.S.-China trade tensions. TI's third-quarter revenue forecast was modestly below the midpoint of Street consensus but still pointed toward decent sequential sales growth at the midpoint of guidance, again signaling that chip demand does not appear to be materially deteriorating further. We think the guidance bodes relatively well for the broader chip industry. We will maintain our $106 fair value estimate for wide-moat TI as we continue to believe that recent headwinds have been cyclical, rather than structural. TI remains a best-in-breed analog chip leader, but shares appear overvalued to us.

TI's revenue in the June quarter was $3.67 billion, down 9% year over year but up 2% sequentially and toward the high point of the firm's prior forecast of $3.46 billion-$3.74 billion as announced in late April, notably before the U.S. government's effective ban of selling into Huawei, which added another layer of near-term headwinds for chipmakers. Industrial and automotive chip sales were each down a high single digit percentage year-over-year, again due to broad-based weakness. Comm equipment revenue, including 5G chips, was even year over year but down sequentially, in part due to the Huawei ban. Gross margins fell about 90 basis points year over year to 64.3% but still held up relatively well, in our view, given soft demand.

For the September quarter, TI expects revenue in the range of $3.65 billion-$3.95 billion, which would represent 0%-8% sequential sales growth but an 11% year-over-year decline at the midpoint of guidance. Looking ahead, TI again did not strive to call the bottom of the latest chip downturn but noted that most cycles have four to five quarters of year-over-year declines, while the September quarter is expected to represent TI's third straight quarter with sales down 5% or more.

Looking at chip demand, TI sees no signs of lost market share, and we continue to believe that near-term revenue headwinds are cyclical, rather than structural. We continue to watch U.S.-China trade discussions, which we believe have weighed on worldwide chip demand for the past few quarters. We still anticipate healthy secular demand for rising chip content in automotive, industrial and Internet of Things, or IoT, devices in the years ahead. Across our semiconductor coverage, our fair value estimates still mostly imply that a U.S.-China trade deal will get done at some point in the future.

Regarding Huawei, TI noted that it generally earns about 3%-4% of revenue from Huawei, both for chips used in communications equipment and smartphones. TI complied with the U.S. ban in the second quarter as expected, but later determined that some parts can legally be shipped into Huawei (including some parts going into communications equipment) and TI is selling such parts today.