Weak Revenues Could See Texas Instruments Stock Shed 15%

Texas Instruments stock (NASDAQ: TXN) is up almost 50% since the beginning of 2020, and at the current price of $187 per share, we believe that TI stock has around 15% potential downside.

Why is that? Our belief stems from the fact that Texas Instruments stock is up nearly 2x since both the end of 2018, and from its low in March 2020. Further, after posting mixed full-year 2020 results, it’s evident that TI did not benefit much from the pandemic. Our dashboard What Factors Drove 98% Change In Texas Instruments Stock Between 2018 And Now? provides the key numbers behind our thinking, and we explain more below.

The stock price rise since 2018-end came despite an 8% drop in revenue from $15.8 billion in FY 2018 to $14.5 billion in FY 2020. However, a 9.5% rise in net margins, meant that net income came in roughly unchanged over this period, and helped by a 5% drop in the outstanding share count, EPS (earnings per share) rose around 6% over this period.

TI’s P/E (price-to-earnings) multiple rose from 16.5x in 2018 to 27x by 2020 end, and has since risen to 31x, riding the rally in technology stocks, but given TI’s mixed FY 2020 results, there is possible downside risk for its multiple.

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 and embedded semiconductor demand. While demand rose 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 nearly 10% lower than the $15.8 billion in 2018 before the semiconductor supply glut kicked in. Additionally, operating margins, too, came in at 40.8%, higher than the 39.8% in 2019 but lower than the 42.5% in 2018. However, 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 31x to around 27x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $160, a downside of around 15% from the current price around $187.

While Texas Instruments stock does not seem attractive currently, 2020 has created many pricing discontinuities which can offer further  trading opportunities. For example, you’ll be surprised how the stock valuation for Activision Blizzard vs. D.R. Horton shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

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