Texas Instruments stock (NASDAQ: TXN) is up 64% since the beginning of this year, and at the current price of around $153 per share, we believe that TI stock has more than 15% potential downside.
Why is that? Our belief stems from the fact that TI stock is still up over 70% from the low seen at the end of 2018, almost 2 years ago. Further, after posting weak Q2 2020 numbers, and with industrial demand still not up to pre-Covid levels, we believe Texas Instruments’ stock could drift lower. Our dashboard What Factors Drove 70% Change In Texas Instruments Stock Between 2018 And Now? provides the key numbers behind our thinking, and we explain more below.
TI stock’s rise since late 2018 came despite a 9% drop in revenues, which further translated into a 10% drop in net income. which combined with a 4% drop in the outstanding share count, led to a 7% decrease in earnings per share (EPS).
In addition, TI’s P/E (price-to-earnings) ratio rose from 16x in 2018 to 24x in 2019, as the semiconductor supply glut cleared out and demand started rising again. The P/E multiple has since jumped to 29x so far this year. However, given TI’s dismal Q2 ’20 numbers and the fact that industrial demand is still not back to pre-Covid levels, there is possible downside risk for TI’s multiple, especially when compared with previous years: P/E of 16x at the end of 2018 and 24x as recently as 2019.
So what’s the likely trigger and timing to this downside?
The global spread of Coronavirus and the resulting lockdowns have hampered demand for TI’s analog and embedded semiconductors across a variety of sectors, especially industrial and automotive. This is evident from TI’s Q2 2020 earnings, where revenue came in at $3.24 billion, down from $3.67 billion for the same period in 2019. Also, as operating expenses didn’t drop as much as revenue, operating margins came in lower at 37.9% from 41.1% for the same period last year. A tax benefit of $101 million vs a tax expense of $209 million last year, helped EPS rise to $1.50 vs $1.38 for the same period last year. However, given the slow demand revival we expect TI’s revenue and operating margins to struggle in the near term.
Regardless, if there isn’t clear evidence of containment of the virus anytime soon, we believe the stock will see its P/E multiple decline from the current level of 29x to around 24x, which combined with a slight reduction in revenues and margins could result in the stock price shrinking to as low as $125, a downside of almost 20% from the current price of $153.
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