Is Texas Instruments Stock a buy it now?

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Texas Instruments (TXN -3.19%) released its first-quarter earnings report on April 26. The chipmaker’s revenue rose 14% year-over-year to $4.91 billion, beating analysts’ estimates of $180 million. Its net profit rose 26% to $2.20 billion, or $2.35 per share, which also beat analysts’ expectations of $0.18.

That earnings report was strong, but it barely moved Texas Instruments (TI) stock, which remains down about 7% year-to-date. Should patient investors buy this blue-chip tech stock as bulls turn away?

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TI growth slows

Texas Instruments generated 78% of its revenue and 84% of its operating profit from analog chips in the first quarter. It manufactures these chips – which include power chain and signal chips – in its own foundries.

It generated 16% of its revenue and 12% of its operating profit from embedded processing chips, which serve as the “digital brain” of various devices. It outsources some of these chips to third-party foundries. The rest of its revenue and operating profit comes from other types of chips.

TI’s revenue rose less than 1% in 2020 as the pandemic disrupted the automotive and industrial sectors, which generated more than half of its revenue. But in 2021, its revenue jumped 27% to $18.3 billion as those sectors recovered and its customers bought more chips again.

This is why the two main IT businesses showed an acceleration in growth in the first half of 2021, then gradually cooled in the second half.

Growth (YOY)

Q1 2021

Q2 2021

Q3 2021

Q4 2021

Q1 2022

Analog

33%

42%

24%

20%

16%

Embedded

17%

43%

13%

6%

2%

Total revenue

29%

41%

22%

19%

14%

Source: Texas Instruments. YOY = year after year.

This year, TI faces tough year-over-year comparisons with this post-lockdown recovery as it struggles through current supply chain challenges and recent COVID-19 lockdowns in China.

As a result, the company expects revenue to remain nearly flat year-over-year (with a median forecast of $4.6 billion) in the second quarter.

But its margins continue to rise

Texas Instruments faces a near-term downturn, but its gross and operating margins have steadily increased over the past year. Its free cash flow (FCF) margins also remained comfortably in the 30s and 40s.

Period

Q1 2021

Q2 2021

Q3 2021

Q4 2021

Q1 2022

Gross margin

65%

67%

68%

69%

70%

Operating margin

45%

48%

50%

52%

52%

FCF Margin*

41%

39%

41%

34%

34%

EPS growth (YOY)

51%

39%

43%

26%

26%

Source: Texas Instruments. * 12 consecutive months.

TI’s margins are increasing as it has upgraded its analog chips from 200mm to 300mm in recent years. This upgrade reduces the cost of its unpackaged parts by approximately 40%.

Unlike high-end chipmakers like Qualcomm (QCOM -5.74%) and Nvidia (NVDA -6.24%)TI focuses on producing low-end chips, which are just as essential as application processors or more expensive GPUs.

This conservative strategy allows TI to operate at much higher margins than most other comparable chipmakers. By comparison, Qualcomm and Nvidia posted operating margins of 35% and 39%, respectively, in their most recent quarters based on generally accepted accounting principles (GAAP).

For the first quarter, TI expects earnings per share (EPS) to also hold steady (with a median forecast of $2.05) as it absorbs headwinds.

TI has withstood cyclical downturns before

IT’s automotive, industrial, communications and data center markets continued to grow in the first quarter, but much of that growth was offset by lower sales in IT markets. consumer electronics and business systems. Those headwinds will likely persist for at least a few more quarters, and analysts expect its revenue and earnings to rise 6% and 8%, respectively, for the full year.

This downturn may seem disappointing, but TI has weathered many cyclical downturns over the years while returning most of its FCF to investors through buybacks and dividends.

This is how it reduced its outstanding shares by 46% between 2004 and 2021 while increasing its dividend every year for 18 consecutive years. It is currently yielding an attractive forward yield of 2.7%, which is well above Qualcomm’s 2.2% yield and Nvidia’s 0.1% yield.

TI also trades at just 18 times forward earnings. This low valuation and high yield should make it a safe security to hold as interest rates rise.

Is it a good time to buy Texas Instruments?

TI probably won’t generate massive short-term returns, but it’s the type of boring, reliable big business that holds up well during market downturns and recessions. Simply put, TI is one of the few tech stocks I would recommend buying in spades in this volatile market.

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