The gains we've seen in chip stocks this year are not up to par with 2013 performances. Even so, it's hard to not like their prospects. At some point, there will be a recovery, given that the market for smartphones and mobile devices has yet to plateau. But I still don't see the justification for shares of Texas Instruments (NYSE:TXN) to carry the valuation they do. With a P/E of 24, Texas Instruments is trading at a multiple that is almost twice that of Intel (NASDAQ:INTC) and 4 points higher than Qualcomm (NASDAQ:QCOM). This is even though Texas Instruments produces one-fifth of Qualcomm's growth.
Although Texas Instruments still has a solid market position in chips and is working to transform its business in analog and embedded processing, the company still lags behind Qualcomm and Broadcom (BRCM) in that all-important mobile devices category. Texas Instruments exited the mobile chip business several years ago and has placed its focus on embedded processors and analog chips. These are the types found in industrial equipment and in the automotive industry.
After divesting the remaining portions of its wireless last year, Texas Instruments is now a pure-play analog and embedded processing company. Management cited weakness in wireless as reason for the exit. But even amid the company's transition into analog and embedded processing, the wireless business was still producing decent results. And based on the recent quarter, I can't say that there's much to be excited about.
Although Texas Instruments did beat revenue expectations with a 2% year over year increase, the absolute results still don't justify the stock's bullishness. And on a segmental basis, the 12% combined growth from its analog and embedded Processing business, which now makes up more than three-quarters of the company's revenue, has to be looked upon as a relative disappointment.
Bulls will argue that the results were in line with expectations. While this may be true, on a sequential basis, Texas Instruments posted 3% and 10% declines, respectively, in analog and embedded revenue. Plus, when looking at the full-year's results, total revenue was down 5% year over year. At best, the results were mixed.
From an operational perspective, Texas Instruments was solid. I have to give management credit. That gross margin arrived at 54.2% was impressive. This helped the company post a profit of $511 million, which almost doubled last year's results. Now, there was never any question about the quality of the company's management. Nor am I concerned with the company's above average manufacturing facilities. My biggest concern is with the stock.
The good news is, the company maintains a strong balance sheet. With close to $4 billion in cash on the books, Texas Instruments will have no problems running its business. Plus, management expects significant cost-savings as the year progresses. This includes elimination of over 1000 jobs. That's all well and good. First-quarter revenue, however, is expected to be between $2.83 billion and $3.07 billion. The low end of the range represents a 2% year-over-year decline.
Now, there's an outside chance that the company might benefit if the chip space fully recovers. But with shares already so richly priced, there won't be any value. Not to mention, expectations assume that if there is, in fact, a rebound in chip demand, rivals like NVIDIA (NASDAQ:NVDA) or even Intel would make no advancement at all. And when you factor in performance metrics like earnings-per-share and revenue growth, it begs the question; what are investors paying for?
While I'm willing to give Texas Instruments the benefit of the doubt that it can turn things around, there's no way that these shares make sense today, especially not after such a so-so performance. By contrast, both Broadcom and Qualcomm, which enjoy the benefit of being suppliers to Apple (NASDAQ:AAPL) and Samsung, continue to eat away at market share.
As it stands, firing workers and being in a state of chronic restructuring is not enough to support an expensive stock. Texas Instruments must figure out a way to secure more business and get its revenues going in the right direction. This is the only way for the stock to work.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by Wall Street Playbook's tech sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.