Why chip stocks are falling despite semiconductor shortage, strong early earnings

Texas Instruments sales fell 11% year-over-year in Q2 2020, but sales have grown year-over-year every quarter since and achieve 41% growth in Q2 2021. However, Texas Instruments forecast a best sales growth of 25% in the third quarter and declined to speculate on what would happen after that.

The question of why the chipmaker is forecasting a sales slowdown as strong chip demand is predicted to last through 2022 was at the heart of Wednesday night’s meeting with analysts and analysts. in the note released on Thursday. During the call, executives continue to push back that the strong growth rate of the past few quarters is unusual due to the COVID-19 pandemic and they do not want to speculate on how long that demand will last. In response, analysts called the forecast “nonsense” and “nonsense” on Thursday.

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Texas Instruments was one of the first major chipmakers to report earnings this season, so similar reports could weigh on a sector that’s experienced a tough end to the demand spike. last demand.

Overall, 2018, the chip industry as a whole was on fire with stock at record highs and rising chip prices leading to record sales. Rising prices caused many customers to double and triple the chip purchase before the price got even higher. The buying and selling activity was so widespread that suddenly, at the end of 2018, demand shut down and chipmakers had to endure large amounts of inventory that took several quarters to sell off.

Chipmakers and manufacturers have been pushing to increase supply, which could lead to a similar problem. Eg. Texas Instruments is purchase a product from Micron Technology Inc.
MU,
-2.59%

for $1.5 billion to increase chip production capacity.

Most analysts dismissed conservatism in Thursday’s notes as Texas Instruments just did. Citi Research analyst Christopher Danley, who has a buy rating and $220 price target, called the Texas Instruments report a “wash, wash, repeat,” in which the chipmaker hit The results were better than expected and gave a cautious outlook “as usual.”

Danley reviewed the results for the past six quarters and found the company had seasonal guidance 5% below average while beating the median guidance of 9%. He expects the same to happen in the third quarter.

Given that Texas Instruments doesn’t surpass end-market sales, Danley estimates 20% of sales are from automotive customers, 37% from industrial stores, and 27% from personal electronics. Texas Instruments splits revenue from the sale of analog electronics, which convert real-world data such as sound or temperature into digital data, and embedded processors, which take that digital data and use it to perform specific tasks.

Raymond James analyst Chris Caso, who has better ratings and a $230 price target, was even more blunt, calling it “another confusing earnings report.”

“Revenue for the quarter beat guidance significantly, but it led revenue unchanged, without much explanation on prudent guidance,” Caso said. “As a result, we now consider guidelines meaningless. Our view is that management may be lacking confidence at the macro level, although what is clear is that supply conditions continue to tighten in both TI and the semi-industrial sector in general.”

Jefferies analyst Mark Lipacis, who has a buy rating and $220 price target, estimates that 19% of Texas Instruments’ revenue comes from sales to automakers while 44% comes from customers. industrial goods and 23% from manufacturers of personal electronics. Lipacis acknowledged the details of the report without much comment and reiterated its positive long-term outlook for the chip industry and Texas Instruments.

Lipacis calls Texas Instruments “a beneficiary of the analog renaissance” over the next five years, in which those analog sensors play a key role in internet-of-things, or IoT, devices that “will be” shipped in 10 years billions of units”.

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Bernstein analyst Stacy Rasgon, who has a market performance rating and $180 price target, previously commented that demand for chips, especially laptop CPUs, is showing signs of peaking.

“The nature of the outlook and tone of Texas Instruments is likely to continue to fuel worries about a (final) top and we note guidance that, although OK on an absolute basis, is the bottom end. seasonal that we’ve seen so far this cycle,” Rasgon said.

Rasgon made a point many other analysts recognize, that Texas Instruments’ share buybacks were lower than expected by $146 million for the quarter, indicating that management doesn’t think the stock has a value. good treatment.

“Overall, while we continue to admire how unequivocally Texas Instruments has adhered to their strategy, it’s hard not to wonder somewhat about the set-up from here, with the company being able to afford it. bear the risk of over-delivery than others, with constraints on gross margins and [free cash flow] Rasgon said.

Evercore ISI analyst CJ Muse, in a note titled “You get what you give,” called the cautionary guidance “nonsense.” Muse has an inline rating and a $200 price target on the stock.

“It could be that this reflects TI just normalizing outsized returns over the past 3 years or building a cash position for M&A, but it can also be emphasized that TI is currently trading at a lower discount. compared to an internally calculated intrinsic value against recent history – so if TI doesn’t want to buy its stock, why should we? ‘ said Muse.

UBS analyst Timothy Arcuri, who has a neutral rating and a $195 price target, suspects that Texas Instruments management may have kept the details private because the company “has a large portion of the product.” deposited”.

“While we don’t consider this a major factor, we’ve heard examples of customers rejecting Texas Instruments because of a lack of other components to complete a kit,” says Arcuri.

Of the 32 Texas Instruments analysts, 14 have a buy rating, 13 have a hold rating and five have a sell rating, according to FactSet, with an average price target of $203.91.