- Silicon chip maker misses estimates for Q4 and cuts guidance for Q1 2024
- Inventory pile-up continues unabated
- Management blames industrial and automotive end markets
- AI is clearly an area of strength for chipmakers, but it is only a small chunk of IT spend (and end demand for chips)
“‘Don’t mess with Texas’ is a campaign to cut littering but silicon chip maker Texas Instruments is doing its best to mess with the stock markets’ preferred narrative of a benign macroeconomic backdrop and soft landing after its disappointing fourth-quarter results for 2023 and weak guidance for the first three months of 2024,” says AJ Bell investment director Russ Mould. “Chip stocks, like many others, are in thrall to the growth potential offered by generative AI, but Texas Instruments offers much wider exposure to end markets and management’s admission that the industrial and automotive segments remain soft is a concern, both for investors who are piling into silicon chip stocks and the wider economic outlook.
Source: LSEG Datastream data
“An ongoing slide in Texas Instruments’ share price is far removed from the surge in NVIDIA or the wider Philadelphia Semiconductor Index, or SOX. Texas Instrument’s shares continue to trade below their summer 2021 peak, when supply chains were clogged, customers were scrambling for product and economies around the world were getting support from both fiscal and monetary stimulus.
“Automotive and industrial end-markets had been an area of particular strength for silicon chipmakers in this respect, and Texas Instruments’ caution here reflects similar statements from Microchip. It will therefore be interesting to see what another broad-based supplier, Franco-Italian firm STMicroelectronics, says on Thursday.
“For now, however, it is a worry that Texas Instruments failed to match even downgraded revenue forecasts for Q4 2023 and lowered analysts’ expectations for Q1 2024. The market had been looking for sales of $4.1 billion in Q1 2024, but the Dallas-headquartered firm guided to $3.45 billion to $3.75 billion. At the midpoint of $3.6 billion, that is down 10% quarter-on-quarter and by nearly a fifth year-on-year.
Source: Company accounts, mid-point of management guidance for Q1 2024E
“That would take revenues back to levels last seen in Q3 2020 and if the forecast proves accurate it would almost be as if the pandemic, lockdowns, interest rate cuts, quantitative easing and furlough schemes had never happened.
“Given the prevailing uncertainty, Texas Instruments offered a wide range of guidance for earnings per share (EPS) in Q1 of $0.96 to $1.16, way below the prevailing consensus of $1.39, according to data from Zack’s. The mid-point of $1.06 implies net income for 2024 of $963 million and that would be the lowest number since the fourth quarter of 2017, which was affected by a jump in the tax charge due to changes in the US tax regime.
Source: Company accounts, mid-point of management guidance for Q1 2024E
“Perhaps the most worrying feature in Texas Instruments’ fourth quarter was yet another increase in inventory. In Q4, stockpiles of unsold product rose 2% quarter-on-quarter even as sales fell by a tenth. Year-on-year, inventory rose 45% even as sales fell by 13%, to take inventory days to 221. Demand will have to increase very quickly to soak up that lot and help Texas Instruments ramp up production to meet growth and margin estimates for the rest of 2024.
Source: Company accounts
“None of this means that consensus forecasts of a 13% improvement in global silicon chip sales in 2024 are doomed as the year just starts. But it does mean they are looking more optimistic, despite the AI boom, judging by the commentary for broad-based suppliers like Texas Instruments and Microchip, and this may just matter to investors whether they have direct exposure to silicon chip stocks or not.
“The chip industry has wider implications beyond the 30 members of the SOX. By dint of their sheer ubiquity, silicon chips are seen as a good indicator of wider global economic activity and here the consensus view is still that there will be a soft landing in the West, if indeed there is any landing at all. The fears of a recession that dominated 2022, for both chip stocks and wider equity and bond markets, have all but dissipated.
“In addition, chip stocks can be a good proxy for wider investor risk appetite. Semiconductor companies tend to be highly operationally geared, so a 1% change in sales leads to a much bigger change in net profits. As such, earnings can be volatile and difficult to predict, so the companies’ share prices warm to forecast upgrades and positive momentum, and recoil from downgrades and falling profit forecasts.
“The SOX index, of which Texas Instruments is a member, has in this respect had an uncanny knack of leading the broader S&P index (and where America goes the rest of the world tends to follow, especially now the US represents more than 60% of global market capitalisation). The SOX index peaked before the S&P tipped into a bear market in 2000 and 2007 and bottomed before the wider index cottoned on to how better times lay ahead in 2003 and 2009 and equities began to enter new bull markets.”
Source: LSEG Datastream data
