Is Texas Instruments Stock a Buy After Earnings Report?

Texas Instruments (TI) (NASDAQ: TXN) experienced a significant drop in its stock price, losing around 7.5% following its latest earnings announcement. While the revenue reported exceeded analysts' expectations, a cautious forecast for the upcoming quarter led investors to sell shares.

This situation may pose a dilemma for long-term investors. Is the reduced outlook a precursor to further declines, or should shareholders see this dip as a chance to purchase more shares?

Overview of Texas Instruments

Texas Instruments is a semiconductor company that often remains underappreciated in the market. Unlike popular chipmakers like Nvidia or Advanced Micro Devices, TI's focus on analog and embedded chips is crucial in the industry. These chips convert analog signals to digital, supporting modern technologies, including artificial intelligence.

TI manufactures over 80,000 different products for more than 100,000 customers, largely targeting the industrial and automotive sectors. Their chips are also found in enterprise systems, communication devices, and personal electronics.

One of TI's strengths lies in its commitment to returning value to shareholders. Under former CEO Rich Templeton, the company became known for its growing dividends, which increased at an impressive compound annual rate of 24% from 2004 to 2023. Presently, CEO Haviv Ilan has maintained this trend, albeit with smaller increases, such as last year's 5% hike, resulting in a dividend yield of 2.9%. This yield significantly outperforms the 1.2% average of the S&P 500, making TI attractive to income-focused investors, especially with its long-standing record of annual dividend growth.

Another distinguishing factor is TI's manufacturing capability; unlike many peers, it controls its own production with 15 fabrication plants operating worldwide. The company is also investing in future growth by building two additional fabs in Sherman, Texas, despite the current industry slowdown.

Texas Instruments Earnings Performance

Looking at TI's financials, there are signs that the current downturn may soon improve. In the fourth quarter of 2024, the company reported revenue exceeding $4 billion, which represented a less than 2% decline from the previous year. This figure surpassed earlier predictions made by the company, where revenue was expected to remain capped at $4 billion.

While it posted overall revenue of just under $16 billion for 2024, marking an 11% decrease compared to 2023, there are positive indicators. Although analog revenue increased by 2%, an 18% decline in embedded revenue affected the overall results.

During this period, the cost of revenue saw a slight rise, leading to net income of $4.8 billion, which was a 26% drop year-over-year. Management's guidance for the first quarter of 2025 anticipates revenue of $3.9 billion at the midpoint, still below the $4.4 billion reported in Q1 2023, signaling that TI's recovery remains incomplete. Consequently, the stock has only appreciated by 9% over the past year, lagging behind the broader S&P 500 during the same period.

Currently, TI's price-to-earnings (P/E) ratio stands at 36, nearing its multi-year highs. This number is significantly higher than its five-year average of 25, leading investors to reconsider the value of this stock given its lackluster recent performance.

Conclusion: Holding Texas Instruments Stock

In light of the current conditions, it seems prudent for investors to hold onto TI stock rather than make new purchases. As mentioned, TI's chips are integral to many modern technologies, positioning it as a reliable long-term investment. Additionally, the rising dividend yield enhances its attractiveness for income-seeking investors.

However, the cyclical nature of the chip industry poses some risks. TI continues to navigate through a slowdown, and the elevated P/E ratio could signal further challenges ahead. While these issues may not hinder TI's long-term growth potential, investors might want to wait until the P/E ratio drops below 25 before considering purchasing additional shares.

Texas, Instruments, Stocks