Texas Instruments Stock Too Expensive At $170?

Texas Instruments stock (NASDAQ: TXN) is up around 33% since the beginning of 2020, and at the current price of $170 per share, we believe that TI stock has around 15% potential downside.

Why is that? Our belief stems from the fact that TI stock has rallied around 80% from the low seen at the end of 2018, more than 2 years ago. Further, after posting mixed full-year 2020 numbers, and with demand still not up to pre-Covid levels, we believe TI stock could drift lower. Our dashboard What Factors Drove 80% Change In Texas Instruments Stock Between 2018 And Now? provides the key numbers behind our thinking, and we explain more below.

TI stock’s strong rise since late 2018 came despite roughly unchanged revenues from FY 2019 to FY 2020. As the semiconductor supply glut cleared out, selling prices rose, driving net margins to 38.7% from 34.9%. This, combined with a 2% drop in the outstanding share count, led to earnings per share (EPS) rising around 13%.

In addition, TI’s P/E (price-to-earnings) ratio rose from around 18x in 2018 to 21x in 2019, as the semiconductor supply glut cleared out, implying a rise in demand. The multiple has further jumped to 28x currently, in line with the rally in technology stocks. However, given TI’s mixed FY 2020 earnings, there is possible downside risk for TI’s multiple, especially when compared with previous years: P/E of 18x at the end of 2018 and 21x as recently as 2019.

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

The global spread of coronavirus and the resulting lockdowns have led to a drop in industrial semiconductor demand. While demand has risen in the latter half of 2020, TI’s revenues in FY 2020 came in at $14.5 billion, up marginally from $14.4 billion in 2019, but still almost 10% lower than the $15.8 billion in 2018 before the supply glut kicked in. Further, operating margins too, came in at 40.8%, higher than the 39.8% in 2019 but still lower than the 42.5% in 2018. However, the company saw a drop across all expenses heads, and this combined with a rise in other income and a lower effective tax rate (7% vs 12.4% in 2019 and 16.5% in 2018), saw net income rise to $5.6 billion, the same level as that in 2018.

However, with revenue growth expected to remain weak in the near to medium term, profitability could take a hit. We believe the stock will see its P/E multiple decline from the current level of 28x to around 25x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $150, a downside of almost 15% from the current price around $170.

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