Texas Instruments Q4 forecast suggests demand has peaked in most end markets

Texas Instruments Stocks at a Glance Current Morningstar Fair Value Estimate: $158Texas Instruments Stocks Star Ratings: 3 StarsEconomic Moat Rating: WideMoat Trend Rating: StableTexas Instruments Earnings Update

Texas Instruments (TXN) reported solid third quarter results but provided investors with a bleak outlook for the fourth quarter. We are lowering our fair value estimate for wide-moat TI to $158 from $166, and while shares are down about 6% after hours to the $153 range, we continue to view TI’s stock as fairly valued.

The sluggish demand for chips for personal electronic devices such as PCs has been well known, but we are concerned about the weakness TI sees in the industrial sector, its largest end market. The chip shortage is effectively over in this end market as TI saw customer cancellations and further weakness ahead; we would attribute such softness to macroeconomic factors. Demand for automotive chips still outpaces supply, but industrial demand has also outpaced supply in previous quarters; but we are now seeing a decoupling of these end markets.

Revenue in the September quarter was $5.24 billion, up 1% sequentially, up 13% year over year, and near the top of the $4.90 billion – $5.30 billion expectation. Car sales were the bright spot, sequentially up about 10%. Disappointingly, industrial revenues were sequentially flat. Unsurprisingly, personal electronics revenues declined about 15% sequentially with weak demand for PCs and similar gadgets. Gross margin declined sequentially by 60 basis points (albeit outside peak levels) to 69.0%. TI still generated a great operating margin of 51%.

For the December quarter, TI expects sales to fall to $4.40 billion – $4.80 billion. In the middle, sales would decline 5% year-over-year and sequentially 12%, although the fourth quarter often sees a normal seasonal decline in sales. We estimate that TI’s guidance midpoint of $1.97 of EPS implies a further decline in gross margin to the 66%-67% range and operating margins to the 47% range. Such results would still be spectacular compared to historical levels, but they would indicate that business conditions have already reached their peak.

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