Texas Instruments Well Placed For The Long Haul, But Not Especially Cheap Today

Texas Instruments’ (NASDAQ:TXN) (“TI”) track records of exceptional margins and market share are no accident, and management has not been afraid to break from the pack to chart its own course (including decisions to build inventory when others cut production, using price to gain share, and eschewing distributors for more direct relationships). Over the long term, this has served investors well, with above-sector performance and a reputation as more of a safe haven in the semiconductor space.

I liked Texas Instruments back in October near the end of a slide that took the shares from the $180s to the $150s, and the shares have done reasonably well since then as the broader semiconductor space also has picked up off its lows. I do see elevated ongoing risk to the sector for at least another three to six months, though, and I don’t expect TI to be as much of an outperformer when the markets go back to a “risk-on” positioning with chip stocks.

An OK hold at these levels, I’m more neutral on the stock as a near-term buy, but I would keep an eye out for the upcoming fourth quarter earnings/guidance cycle as a potential opportunity to pick up shares on a pullback.

 

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Texas Instruments Well Placed For The Long Haul, But Not Especially Cheap Today

Texas Instruments Should Be Well-Placed To Navigate 'Interesting Times' For The Semiconductor Sector

As the Street has come around to the idea of weaker demand in 2023, semiconductor stocks have had a rougher go of it lately, and Texas Instruments (NASDAQ:TXN) ("TI") is no exception. While TI has held up better than the average chip company (fair, given its quality), falling about 10% since my last update versus the 25% drop in the SOX index, the shares have moved into that $150’s range that I said I would find more interesting.

I do see some risk of a greater slowdown in auto and industrial demand in 2023, but I believe the longer-term outlook for TI is unchanged – while the last couple of years have been unusual in terms of demand and supply trends, I believe the increased electrification seen across numerous end-markets is not some temporary aberration. With that, I expect healthy mid-single-digit long-term revenue growth from TI as well as strong margins. The shares now look attractively-priced, though readers should be aware of the overall risk that a higher, sharper peak in this last semiconductor cycle could well be followed by an unusually sharper trough before a stronger recovery in 2024.

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Texas Instruments Should Be Well-Placed To Navigate 'Interesting Times' For The Semiconductor Sector

Texas Instruments Paying To Grow, But There Are Challenges Ahead

 

The semiconductor space is never boring, but it’s getting more interesting as evidence mounts that the industry is coming off a peak. Evidence of inventory-building is likely to mount as the year goes on and orders are likely to shrink, leading to a correction in 2023-2024, and the global shock from the Russian invasion of Ukraine isn’t helping. On top of that, it’s getting more and more expensive to add capacity.

My not-so-positive outlook on Texas Instruments (TXN) hasn’t always been the most popular call with some commenters, but the results are what they are – the company has continued to lag the SOX since my last update (down 11% versus down about 1%), as well as chip stocks I’ve preferred like Broadcom (AVGO), ON Semi (ON), Renesas (OTCPK:RNECY), and STMicro (STM).

At this point, TI still isn’t a preferred name for me, as I still see more upside in names like STMicro and less end-market risk at Broadcom. Should this slide continue and TI drops into the $150’s in the near term, though, that’s a different story for another day.

 

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Texas Instruments Paying To Grow, But There Are Challenges Ahead

Texas Instruments Still Beyond Criticism On Quality, But Not So Bulletproof On Valuation And Expectations

 

My “love the company, don’t love the stock” position on Texas Instruments (TXN) hasn’t changed all that much, and with the shares up about 8% since my last update (slightly better than the SOX index, slightly worse than the S&P 500), I don’t feel like I’ve missed out on much by not owning the shares. To be clear, TI was, is, and likely will remain one of the best-run semiconductor companies, but expectations have gotten high and it seems as though the Street may be getting a little more nervous about how much juice is left to squeeze in the sector.

While I can still see a path to $200-plus in the short term, I think TI’s priced more for mid-single-digit annualized long-term returns today, and that’s not enough for me, though I’d certainly rather own TI than a bond with similar return potential.

 

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Texas Instruments Still Beyond Criticism On Quality, But Not So Bulletproof On Valuation And Expectations

This Recovery Cycle Is Showing Why Texas Instruments Is Among The Best In The Business

To quote George Peppard's Hannibal Smith from the original A-Team, "I love it when a plan comes together." Texas Instruments' (TXN) relatively bold decision to maintain production capacity during the downturn risked some adverse numbers for gross margins and balance sheet metrics in a slower (or delayed) recovery, but left the company in perfect position to benefit from the sharp rebound in demand for auto and industrial semiconductors. While this period of elevated demand won't last forever, it will do great things for the numbers for a while.

It wasn't as if TI's excellent management was really in doubt, but this is just another confirmation that this really is one of the best-run chip companies in the business. Not everything at TI is perfect (share loss in MCUs merits watching), but there's little question that this is a core holding in the chip space. Still, I thought the shares were expensive back in October, and while they've done well since, they still have lagged the SOX index and chip names I preferred like ON Semiconductor (ON) and STMicroelectronics (STM).

What can be debated is whether today's valuation is still reasonable. TI management would seem to have some doubts, as they've made no buybacks in the last two quarters, despite no liquidity worries. If I dial everything up to "11", I can get to the mid-$170's, but then again I can't rule out at least a couple more strong quarters on this demand rebound. I understand the fear of selling in the $170's only to see the shares hit $200 or more on a blow-off, but while I think TI is a great long-term holding, I won't be buying it for my own portfolio here.

 

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This Recovery Cycle Is Showing Why Texas Instruments Is Among The Best In The Business

Texas Instruments Is Off And Running On The Latest Upcycle

I expected Texas Instruments (TXN) to have a good third quarter, and felt even better about that when STMicro (STM) and NXP Semiconductors (NXPI) previewed good auto results and PC shipment data continued to come in strong, but I didn’t quite expect the level of performance TI actually produced. Kudos to management, and it may well be the case that the company’s decision to maintain high utilization rates (building inventory) has helped goose a cyclical recovery in the sector.

As far as valuation and stock performance goes, my view on TI last quarter was that it was a decent enough hold but not my favorite idea. With the post-earnings sell-off, TI’s performance has been basically inline with the SOX, while names I preferred more (STMicro, Renesas (OTCPK:RNECY)) have done better. TI is trading at a roughly 20% premium to the analog sector versus a long-term trailing average of a 10% premium. While I do expect that TI will see several quarters of growth in this up-cycle, as well as long-term growth in excess of the underlying markets, I have some concerns that the run over the last six months anticipated some of this.

 

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Texas Instruments Is Off And Running On The Latest Upcycle

Texas Instruments Zigging When Others Zag

Texas Instruments (TXN) is a well-respected name in the semiconductor sector, and not unlike Broadcom (AVGO), TI management has earned that respect with sound management practices and a willingness to break away from the “growth above all” philosophy that has often dominated the space. While I thought TI was overvalued back at the time of fourth quarter earnings, the stock has more or less tracked the SOX index since then.

Not everybody is going to agree with it, but TI is once again showing a willingness to break from the pack during this downturn. Learning lessons from prior downturns, when unexpected recoveries in demand caused production difficulties and headaches for customers, TI is choosing to invest in inventory and keep production levels relatively high. If this strategy pays off (particularly if there’s a more V-shaped recovery in TI’s markets), TI could gain share at the expense of rivals that don’t have the balance sheet to do this.

The relative valuation is a little better here now, but still not at a level that I’d say is a clear-cut buy, and I’d still prefer Broadcom (which I own) at these prices.

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Texas Instruments Zigging When Others Zag

Texas Instruments Sees Stabilization, But The Street Expects So Much More

At this point, chip stock bulls really need to hope that there’s not so much as a stumble for the growth trajectories for new cars, 5G, new smartphones, and industrial automation, as the stocks by and large already reflect a very robust rebound scenario that leaves little room for disappointment. Texas Instruments (TXN), which does admittedly lean toward the conservatism with its commentary, didn’t exactly fan the flames, acknowledging with fourth-quarter earnings that its markets have largely “stabilized”, while offering guidance that was slightly above expectations for the first quarter of 2020.

I’ve written before that I believe a number of quality chip companies, including Infineon (OTCQX:IFNNY), Microchip (MCHP), Maxim (MXIM), ON (ON), and STMicroelectronics (STM) have run up too aggressively in anticipation of this recovery, leaving upside tied to further acceleration in end-market demand – an acceleration that may be at risk giving what companies are saying about their 2020 outlooks. In any case, specific to TI, I can’t say that I see much value here, and if I had to own an overpriced chip stock, I suppose TI’s well above-average quality would be an argument in its favor.

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Texas Instruments Sees Stabilization, But The Street Expects So Much More

ON Semiconductor Not Out Of The Woods Yet

I’ve been bullish on ON Semiconductor (ON) for a while, but I thought the shares were a little ahead of themselves back in February, particularly given what I thought were risks that semiconductor companies would see a longer correction process from record high lead times and less growth in 2019. While semiconductor stocks as a whole have continued their upward march (despite some iffier reports), ON shares have underperformed since mid-February, falling slightly against a 15% increase for chip stocks in general and more modest performances from fellow power peers like Infineon (OTCQX:IFNNY), STMicro (STM), and Texas Instruments (TXN).

I’m still concerned about full year expectations for 2019, particularly with record high inventory and what I think will be a weaker second half economy than commonly expected now. Longer term, I still like ON and I think fair value is in the low-to-mid $20’s. Although I hesitate to recommend these shares without reservation because I think there could be a market correction that takes the shares back to around $20, investors who less inclined to try to time the market and/or willing to hold longer term can certainly consider this name today.

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ON Semiconductor Not Out Of The Woods Yet

All Is Seemingly Forgiven As Silicon Labs Rockets Back Into Growth Investors' Good Graces

It’s been a wild ride for Silicon Labs (SLAB). Something of a growth darling (at least at times) over the last few years, Silicon Labs actually underperformed the SOX in 2018 and closed the fiscal year with an ugly miss-and-lower. While the shares had followed the year-to-date rally in semiconductor stocks, it was still lagging before a surprisingly strong first quarter seemingly shifted sentiment overnight.

I had previously said I’d be interested in SLAB in the low $70’s, and it never quite got there before this rocket ride back toward $110. Therein lies the problem with trying to be disciplined on price/value, particularly when it involves growth stocks. Although Silicon Labs looks too pricey now, I can understand why at least some investors are piling back in – SLAB is setting up attractive qoq growth rates at a time when many semiconductors still look likely to struggle to post attractive growth.

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All Is Seemingly Forgiven As Silicon Labs Rockets Back Into Growth Investors' Good Graces

STMicroelectronics Still Counting On A Big Finish To 2019

When I last wrote about STMicroelectronics (STM), I cautioned against trying to get too cute about timing a bottom for this leading chip company, particularly when the shares looked undervalued even on the assumption of a tougher 2019. The shares have since risen another 15% or so, lagging a broader chip market rally that has surprised me in its intensity.

I continue to like STM, though perhaps not quite as much as before given the rising valuation, and I like the company’s broad leadership across microcontrollers, PMICs, sensors, MEMS, silicon carbide, and so on, as well as the diverse market exposure to attractive markets like autos, industrial, IoT, and imaging. Although I am still concerned that the big second half rebound that so many chip companies are counting on may disappoint, I still think STM is a stock worth buying and owning today.

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STMicroelectronics Still Counting On A Big Finish To 2019

The Market Seems To Be Counting On A Quick Rebound At Maxim Integrated

There are a lot of meaningful positives with Maxim Integrated (MXIM). Not only has this company successfully transitioned to a more attractive end-market mix driven by auto electrification and factory automation, the company has also meaningfully upgraded its profitability by pruning lower-return businesses, bringing more distributors into the mix, and outsourcing more production. With strong margins, above-average growth potential, and a strong business anchored in power management and interface ICs, I believe Maxim can do well on its own and/or become an attractive acquisition target.

All that said, there are limits to what I’ll pay and Maxim is trading beyond those limits. Recent results and guidance should serve as a reminder that Maxim’s better mix doesn’t immunize it from macro challenges, and I am concerned that investors have gotten too cavalier about assuming a quick return to growth across the chip sector. In the $50’s, Maxim just looks too expensive to me relative to the risks of further setbacks/revisions in the sector.

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The Market Seems To Be Counting On A Quick Rebound At Maxim Integrated

Microchip Called The Bottom... But What Will The Bounce Look Like?

Microchip’s (MCHP) CEO Stephen Sanghi has never been what you might call shy or retiring, but his call for the March quarter being the bottom of this cycle still got plenty of attention. In the case of Microchip, it may well be true, though there are caveats related to trade talks between the U.S. and China and not so much certainty on what the shape of the post-bottom bounce is going to look like.

I liked Microchip back in mid-September and the 10%-plus return since then has meaningfully outperformed semiconductors in general, as well as more MCHP-relevant comps like STMicroelectronics (STM), Infineon (OTCQX:IFNNY), Texas Instruments (TXN), and NXP (NXPI). While I do think there are still attractive revenue and margin drivers in play here, I’m not quite as bullish as I was before and I think there are other names to consider in the MCU/analog/FPGA space.

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Microchip Called The Bottom... But What Will The Bounce Look Like?

Content And Share Gain Expectations Driving Outperformance At ON Semi

I really can’t complain about ON Semiconductor’s (ON) performance since my last update, as the shares have dramatically outperformed the semiconductor rally and risen by more than a third. While power management companies (including ON, Infineon (OTCQX:IFNNY), and STMicro (STM) ) have done a little better with respect to performance and guidance than others like Texas Instruments (TXN), Maxim (MXIM), and NXP (NXPI), it seems like ON in particular has regained investor interest on the back of solid wins, improving bookings, and management’s confidence that revenue will grow in 2019.

I still like ON shares, but not as much as I did back in December. The semiconductor sector as a whole has a lot riding in terms of guidance on a second half rebound and I think it may be premature to just rule out another round of guidance cuts due to weaker conditions in China (autos and manufacturing) and emerging weakness in Europe (Germany and Italy). I think ON shares should now be trading closer to the mid-$20’s, but it may make sense to let things simmer down a bit first.

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Content And Share Gain Expectations Driving Outperformance At ON Semi

A Brutal Miss-And-Lower-Guide Has Silicon Labs' Growth Premium In Question

It’s generally accepted by most investors that you have to pay up for growth, but with the recent weak performance at Silicon Labs (SLAB), including an ugly guide-down for the first quarter, I’m concerned that these shares could be liable to investors asking “wait … why are paying up for this?” I had previously expressed my view that Silicon Labs was entering a rocky operational stretch, but this is a little worse than I’d expected, and the company definitely needs markets like IoT, isolation, and timing to start coming through in the second half of 2019.

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A Brutal Miss-And-Lower-Guide Has Silicon Labs' Growth Premium In Question

Xilinx Emerges As A Semiconductor Unicorn And Shivs The Shorts

Not too many semiconductor stocks have reported as of this writing, but with the Texas Instruments (TXN) and Intel (INTC) reports in, it looks like the market's fears of another round of downward guidance revisions for the first quarter are materializing. But then, there's Xilinx (XLNX) - quite possibly a true unicorn this quarter in not only reporting very strong growth (revenue up 34% yoy and 7% qoq) but also guiding UP for the next quarter.

With strong earnings and the 5G opportunity seeming to come through sooner than expected, Xilinx shares shot up almost 20% and set a new 52-week high. Xilinx has a legitimate, differentiated opportunity with its strong FPGA and FPGA/SoC portfolio, including near-term opportunities like 5G wireless and auto ADAS and longer-term opportunities like data center/AI and autonomous driving. Although I think Xilinx can generate double-digit long-term revenue growth and that today's DCF-based fair value isn't unreasonable, it's certainly not an overlooked opportunity at this point.

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Xilinx Emerges As A Semiconductor Unicorn And Shivs The Shorts

Renesas Pummeled On Inventory Corrections And Worsening Macro

Japan's Renesas Electronics (OTCPK:RNECY) (6723.T) is a microcosm of what worries me about the semiconductor industry heading into 2019. Elevated lead times and strong orders lead Renesas, its distributors, and its end-customers to build up inventories, and those inventories eventually got much too large, leading to a painful reset as demand has tapered off. In addition to this inventory correction process, there are growing worries about auto unit demand growth in 2019, not to mention demand from factory automation, appliance, and consumer device end-markets. More specific to Renesas is also, I believe, a growing concern over how the company stacks up competitively in the evolving auto semiconductor landscape.

Although I take the risks of share loss to competitors seriously, I think the shares are pricing in an extreme level of pessimism for Renesas's future. Even with near-term margin issues likely capping some of the upside, I believe the shares are just too cheap for one of the global leaders in microcontrollers and a company set to benefit from the acquisition of Integrated Devices.

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Renesas Pummeled On Inventory Corrections And Worsening Macro

Between Weak iPhones And Ongoing Margin Challenges, Qorvo Can't Catch A Break

I’m sure some Qorvo (QRVO) shareholders will take exception with this, but more and more this company is reminding me of that kid we all know from high school who was uncommonly talented but somehow just never managed to put it together. Management certainly bears some responsibility (particularly for the ongoing challenges in hitting margin targets), but other issues outside of their control like weak iPhone unit sales have undermined some of the positive drivers.

Qorvo shares look undervalued by most metrics I track, but I think it is fair to ask if revenue and margin leverage expectations are still too high, particularly as high-end handsets don’t seem to offer the growth they once did. There are still credible drivers in markets like IoT, wireless infrastructure, and even handsets, but I’d like to see at least another quarter before stepping up and buying these beaten-down shares.

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Between Weak iPhones And Ongoing Margin Challenges, Qorvo Can't Catch A Break

Silicon Labs Well-Placed For Long-Term Growth, But The Short-Term Could Get Rocky

With both fundamentals and sentiment in and around the semiconductor sector noticeably cooling, valuations are getting more reasonable and attractive on a long-term basis, but the correction process still has some distance to go. In an environment where GDP growth seems likely to slow, Silicon Labs (SLAB) could well be looking at a period where the improvements in the business go largely unrewarded by the market until institutional investors feel comfortable moving back into semiconductor growth stories.

I didn’t think Silicon Labs was attractively priced for a “buy” back in August, and the shares are down another 20% or so since then (slightly underperforming the SOX). I still don’t consider today’s price a slam dunk, but I do believe the company is making progress and becoming better-positioned for future growth in multiple end-markets. A price in the low $70’s would be more interesting to me, but I’m hesitant to dive into chip stocks today given the prospect for worsening outlooks for autos and industrial markets and the risk of at least another round or two (if not more) of cuts to expectations.

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Silicon Labs Well-Placed For Long-Term Growth, But The Short-Term Could Get Rocky

Microchip Looks Undervalued, But There Are Short-Term Challenges To Consider

Buying good companies on stumbles is a time-tested strategy, but one that stills carries risk – it’s not always easy to separate a stumble from a prolonged tumble down the stairs. In the case of Microchip (MCHP), while issues related to its recent Microsemi purchase loom larger in the short term, I’m a little more concerned about the potential impact of extended lead times and weakening demand in important end-markets.

I believe Microchip has proven itself to be a well-run chip company, and I like the company’s diverse capabilities across microcontrollers (or MCUs) and analog, as well as the new opportunities brought in with the Microsemi deal (including FPGAs, timing products, data center products, and so on). Although this may not be the ideal time to buy given sentiment toward the semiconductor space, the long-term value proposition makes this a name worth considering for more value-driven investors.

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Microchip Looks Undervalued, But There Are Short-Term Challenges To Consider