Texas Instruments stock (NASDAQ: TXN) is up around 15% since the beginning of this year, and at the current price of $186 per share, we believe that Texas Instruments stock could drop more than 10% in the medium term.
Why is that? Our belief stems from the fact that Texas Instruments stock is up nearly 2x since late 2018, and despite steady earnings growth over the past two quarters, we believe Texas Instruments stock could head lower. Our dashboard What Factors Drove 97% Change In Texas Instruments Incorporated Stock Between 2018 And Now? provides the key numbers behind our thinking, and we explain more below.
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Texas Instruments’ stock price rise since 2018 came despite a 2% decrease in revenues from $15.8 billion in FY 2018 to $15.4 billion over the last four quarters. However, helped by a 5% drop in the outstanding share count, RPS (revenue per share) rose marginally from $16.20 in FY 2018 to $16.60 on an LTM basis.
Additionally, Texas Instruments’ P/S (price-to-sales) ratio jumped from 5.5x in 2018 to 10.5x by 2020 end, and has since risen marginally to 11.2x currently. We believe that given TI’s long-term earnings trend, there is a possible downside risk for the P/S multiple.
So what’s the likely trigger and timing to this downside?
The global spread of coronavirus and the resulting lockdowns led to an initial drop in semiconductor demand, especially from the industrial and automotive sector. However, with economies opening up globally, demand for TI’s analog semiconductors has risen. This is evident from TI’s Q1 2021 earnings, where revenue came in at $4.29 billion, a steady rise from $3.33 billion for the same period in FY ’20. Shrewd expense management saw TI’s operating margins rise strongly from 37.4% to 45.2%, which helped EPS rise to $1.89 from $1.25 over this period.
However, it’s important to note that revenues in FY 2020 (at $14.5 billion) look weak when compared to those in FY 2018, which stood at $15.8 billion. Despite demand and revenues rising YoY in Q1 2021, given TI’s overall revenue and earnings trend since FY 2018, we believe that the company does not warrant a P/S multiple as high as 11x. While TI’s upcoming Q2 2021 earnings later this week will paint a clearer picture, we believe that in the medium term the stock will see its P/S multiple decline from the current level of 11.2x to under 10x, which despite being supported by a slight increase in revenues and margins, could result in the stock price shrinking to as low as $165, a downside of more than 10% from the current price near $186.
While Texas Instruments Incorporated stock may move lower, it is helpful to know how its peers stack up. Texas Instruments Comparison With Peers summarizes how Texas Instruments compares against peers on metrics that matter. You can find more such useful comparisons on Peer Comparisons.