Is the party over for Texas Instruments (TXN) stock? For months, shares in the major semiconductor company trended higher, fueled by the tailwinds from the global chip shortage.
Since the end of April, though, this factor has no longer been sending shares to new highs. Following last month’s earnings and guidance release, investors have become more uncertain about results in upcoming quarters.
As a result, after sliding back from above $190 per share, the stock has bounced between around $180 and $185 per share in the past few weeks.
Some may see this sideways trading as an opportunity, but with shares still sporting a stretched valuation (a product of the past excitement over the chip shortage), shares may have more room to slide from here. (See Texas Instruments stock analysis on TipRanks)
TXN Stock and Cooling Enthusiasm
For its fiscal Q1 2021 (quarter ending March 31, 2021), Texas Instruments beat on both revenue and earnings. Sales for the quarter came in at $4.29 billion, ahead of analyst projections of $4 billion in revenue.
Earnings for the last quarter were $1.87 per share, well above the sell-side’s range of $1.44 to $1.66 per share. As mentioned above, these numbers were not enough to further excite investor interest in TXN stock.
Management’s commentary, on the surface, sounded bullish for the coming quarter. They described plans to increase their manufacturing capacities in response to strong demand for their chips.
Upon deeper examination, analysts are questioning the veracity of the company’s guidance. While its updated revenue forecast is above prior estimates, these numbers still point to lower-than-expected quarter-on-quarter growth. This is a matter for concern, because the forecast does not match up well with the stock’s still-premium valuation.
That inconsistency doesn’t necessarily indicate a big downside risk for the stock, but it may pave the way for shares to continue pulling back.
Shares Remain Richly Priced Compared to Peers
After sliding back from its highs, TXN stock might be ready to recover (at least partially) from its recent losses. Yet, given its still-premium forward P/E ratio, a recovery may not be in the cards.
Sure, in today’s market, a 24.4x forward P/E is by no means frothy. That being said, it’s still much higher than what similarly-sized chip peers trade for at present. For example, Broadcom (AVGO) and Qualcomm (QCOM) sport forward P/E ratios of around 16.4x and 16.7x, respectively.
Another similar play, Analog Devices (ADI), does sell at a similar forward valuation to TXN (around 25.3x). Like TXN, this company counts the automotive and communications industries as key end-users for its chips. At the same time, ADI has more justification for its forward multiple, as it’s growing at a much fast clip than TXN.
Until we see more signs that the aforementioned chip shortage tailwinds will continue to boost Texas Instruments’ results, it’s hard to see its current valuation as sustainable.
What Analysts are Saying About TXN Stock
According to TipRanks, TXN stock has a consensus rating of Moderate Buy. Out of 18 analyst, 10 rate it a Buy, 6 analysts rate it a Hold, and 2 analysts rate it a Sell.
As for price targets, the average analyst price target on TXN stock today is $205.06 per share, implying around 10.8% upside from today’s prices. Analyst price targets range from a low of $170 per share, to a high of $235 per share.
Bottom Line: Pullback More Likely Than Rebound
For the past few weeks, many chip plays, much like Texas Instruments, have pulled back. Investors fear a post-chip shortage crash across the board. This fear may be overblown, at least according to Citi analyst Christopher Danely, who still believes the sector has more upside before the crash.
All the same, it’s tough to avoid the likelihood that growth is set to slow in upcoming quarters. This may make it a challenge for TXI, sporting a forward P/E on par with faster-growing rivals, to maintain its current valuation.
It’s not set in stone, but this may signal that a continued pullback is more likely than a rebound. Investors may remain cautious, and less likely to dive back in, in light of their recent disappointment with Texas Instruments’ earnings release.
Disclosure: Thomas Niel held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
