Can Texas Instruments Stock Drop To $54?

Despite an almost 12% decline in Texas Instruments’ (NASDAQ: TXN) stock since the beginning of this year, as the spread of the novel Coronavirus rattled the stock markets and the broader economy, at the current price of $112 per share, we believe Texas Instruments has a significant downside if there are no signs of abatement of the crisis by June 2020. The key is TI’s stock is still about 15% higher than it was at the beginning of 2018, a little over 2 years ago. We estimate that TI’s stock price could decline to levels of around $54 (worst-case scenario) if its revenues fall by 25% vs. FY’19, its margins contract by 15% to about 26.2% in 2020 (as it continues paying its staff along with incurring other fixed expenses), and its valuation multiple drops further to 18x. Below, we summarize this possible downside case for TI, which is detailed in our interactive dashboard analysis Texas Instruments Downside: How Low Can Texas Instruments Stock Go?

So what’s the likely trigger and timing to this downside?

• The global spread of coronavirus has led to slowdown in industrial and economic activity, thus affecting manufacturing activities. This will lead to lower demand for TI’s analog devices, and embedded semiconductors, which are used across a wide variety of applications such as the automotive industry, enterprise communications, and industrial equipment. We believe TI’s Q2 results in July will confirm the hit to its revenue, with the management having already warned that the next few quarters will be difficult.
• Specifically, we believe the full-year revenue expectations formed by the market may be closer to $10.8 billion, about 25% lower than its 2019 revenue of $14.4 billion, and 32% lower than the 2018 revenue of $15.8 billion.
• The market has seen this coming, and TI’s P/E multiple, which has already shrunk from around 24x to 21x, could likely drop further to around 18x.
• The 25% reduction in revenues will not accompany a proportional reduction in expenses, as compensation expenses and other fixed costs like rent for manufacturing plants and upkeep of other machinery are likely to fall by a smaller percentage. This will likely result in the net income margin shrinking by a little over 15% from 30% in 2019 to about 26.2% in 2020.
• This, in turn, would translate into a stock price drop of about 52%, close to $54.

Will such a drop be justified? Absolutely not. However, investors who are first out the door in a panic selling situation take a smaller hit to their portfolio.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

We do believe these trends are likely to reverse in later quarters of 2020, and as the Coronavirus crisis is tamed during late Q2, higher revenue and earnings expectations will replace the dire scenarios that are easily imagined during difficult times.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. It complements our analyses of the coronavirus outbreak’s impact on a diverse set of companies. The complete set of coronavirus impact and timing analyses is available here.

You can see how Covid-19 has affected TI’s semiconductor peer Cree, in our dashboard How Did Cree Stock Fare Compared With S&P 500?

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