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Texas Instruments (NASDAQ:TXN) stock has risen by just about 7% year-to-date, compared to the broader Nasdaq-100, which is up by almost 10% year-to-date. While the broader semiconductor industry has seen a recovery from a cyclical downturn in recent quarters led by the surge in demand for artificial intelligence chips and a recovery in the personal computing market, Texas Instruments has been facing some headwinds as major customers scale back on purchases.

Over Q1, sales declined by about 16% year-over-year to $3.66 billion, while earnings came in at $1.10 per share, weighed down by weaker sales of both analog semiconductors and embedded products. The company’s product lineup – which includes analog semiconductors and embedded systems – is seen to be more dependent on macroeconomic factors, compared to other parts of the semiconductor industry. On the automotive front, customers have been working through their existing inventory levels after stocking up following the Covid-19 supply crunch. Moreover, the company also makes a host of products for industrial customers including analog products such as amplifiers and power management devices, as well as processors and microcontrollers specifically designed for industrial automation and this segment saw revenue decline in the high single-digits over the previous quarter. Customers in the communications equipment sector have also scaled back on purchases, with sales declining 25% as the pace of 5G deployment cools off. The company’s margins have also faced pressure, with gross margin contracting 320 basis points to 66.1% over the previous quarter. Margins are being impacted by the smaller revenue base as well as slightly higher production costs associated with reduced factory loadings.

Looking over a slightly longer period, TXN stock has seen little change, moving slightly from levels of $165 in early January 2021 to around $180 now, vs. an increase of about 40% for the S&P 500 over this roughly 3-year period. Overall, the performance of TXN stock with respect to the index has been lackluster. Returns for the stock were 15% in 2021, -12% in 2022, and 3% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that TXN underperformed the S&P in 2021 and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including MSFT, AAPL, and NVDA, and even for the mega-cap stars GOOG, TSLA, and AMZN.

In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could TXN face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

For the second quarter, Texas Instruments expects to earn between $1.05 and $1.25 per share, with sales between $3.65 billion and $3.95 billion, which was ahead of expectations although it would still mark a decline of about 10% year-over-year at the upper end of the guidance range. However, there are some positives for the company. Semiconductor content is expected to grow steadily in the coming years in the industrial sectors, as automation gathers pace. The automotive sector is also expected to see strong growth, driven by connected and self-driving vehicles. The Industrial and automotive sectors together accounted for about 75% of TI revenue in 2023 and the two end markets have expanded at an annual rate of 10% since 2013. This trend could continue going forward as well. The company also invested considerably to expand its 300mm wafer fabrication capacity in the U.S. This helps the company reduce geopolitical risks, while also improving efficiency and long-term competitiveness. Texas Instruments stock trades at about 45x forward earnings, which is slightly high, in our view. We value Texas Instruments at about $175 per share, marginally below the current market price of $182. See our analysis of Texas Instruments Valuation: Expensive or Cheap for a closer look at what’s driving our price estimate for Texas Instruments.

[1] Returns as of 5/7/2024
[2] Cumulative total returns since the end of 2016

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.