The Economy Beats Down Texas Instruments
Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Semiconductor bellwether Texas Instruments (NASDAQ: TXN) has endured a rough time over the past few quarters with falling profits and shrinking margins. The company’s revenue shrunk 4% from last year to $3.34 billion in the second quarter, accompanied by steep declines in operating profit and earnings. Although TI did beat the Street’s bottom line expectations, it didn’t do much to offer signs of a turnaround with a lowly outlook.
TI’s chips are used in a range of products spread across diverse end markets. Hence, its various businesses are quite susceptible to economic events. With the economy not being in a good state, TI’s business and outlook took a hit.
Almost all of TI’s segments dropped from last year, except Analog, which grew 13%. But this jump was driven by the acquisition of National Semiconductor, which TI purchased last year. Embedded Processing was down 15% and Wireless revenue dropped a staggering 39%. TI’s clients are curtailing their purchases despite having low inventories. This is directly a result of the sluggish economy as TI’s customers aren’t seeing enough demand for their products from end users.
TI’s malaise is not unexpected if we take a look at chip behemoth Intel (NASDAQ: INTC). Intel is feeling handicapped by sluggish demand in North America and Western Europe, while finding life difficult in emerging regions like China. These factors led the company to issue an alarming outlook for the ongoing quarter where it might even miss estimates.
Moreover, the semiconductor industry has been in a depressed state since the middle of last year and it seems as if it is bottoming out and is set for growth. However, the recovery might have been put on hold as end markets lose steam and consumers control their spending, leading to lower demand for TI’s chips.
Losing mobile ground
Also, TI has lost ground in the market for mobile chips to its more illustrious rivals. The company had a strong relationship with Nokia (NYSE: NOK), making digital signal processors (DSP) for its phones. But Nokia decided to look at other suppliers as well for sourcing its chips and this led TI to wind down its DSP business. But considering Nokia’s current position in the market and all the negatives that surround it, TI’s position might not have been much better in the market. Even though the company’s OMAP chip is used by Samsung, Motorola and others for smartphones, none have been successful enough to drive TI’s fortunes.
The bottom line
Texas Instruments has had a pretty forgetable year so far, trading almost 9% down to date as of this writing. Going by the prevailing economic conditions, the industry and the company’s own outlook, it would be better to stay away from TI and look for other fruitful avenues until a recovery is in sight.
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