Texas Instruments Stock Drops 11% on Cautious Outlook

Texas Instruments, a leading manufacturer of analog chips and embedded processing solutions, released its earnings report on the morning of July 23. The report, along with the management's performance outlook, led to a significant drop in the company's stock price during after-hours trading, falling by more than 11%. This decline was primarily due to market concerns that the surge in chip demand, driven by Trump's tariff policies, might be short-lived. Texas Instruments' underwhelming performance set a disappointing tone for the earnings season of chip giants, causing stocks of other major U.S. chip companies, including NVIDIA, Broadcom, and AMD, to weaken during after-hours trading.

In a statement released on Tuesday, the management of Texas Instruments projected third-quarter total revenue to be between 44.5 billion and 48 billion. While this figure met the average analyst expectation of 45.7 billion, it fell short of some analysts' more optimistic projections exceeding 48 billion. Given the company's stock price had been at record highs this year and market expectations for a surge in domestic analog chip demand due to Trump's tariff policies, the cautious revenue outlook failed to satisfy market expectations.

For the third quarter, Texas Instruments' earnings per share were projected to be around 1.48, slightly below the average analyst estimate. This outlook introduced uncertainty into the company's path to recovery and the overall resurgence of analog chip demand.

Texas Instruments' overall revenue has been on a recovery trajectory since 2024. However, Trump's global tariff campaign, initiated in April, has made the demand outlook uncertain. During a conference call with analysts, the company's executives noted that while there was a strong initial demand in the second quarter due to tariffs, the order levels for chips had since returned to normal recovery expectations. The Chief Financial Officer emphasized the company's confidence in its strategy, stating that opportunities outweigh challenges.

Based on the midpoint of the forecast, third-quarter revenue is expected to grow by 11%, a slight slowdown from the previous quarter. However, the company remains confident in ultimately surpassing the 200 billion annual revenue peak. Despite the cautious outlook, Texas Instruments' stock had risen by over 15% since the beginning of the year, driven by the resurgence in demand for analog chips and microcontrollers, as well as the broader rally in semiconductor-related stocks.

Texas Instruments is the world's largest manufacturer of analog chips and microcontrollers, providing essential functions in a wide range of applications, such as converting power to different voltages in electronic devices. Analog chips play a crucial role in various key modules and systems of electric vehicles, including power management, battery management, sensor interfaces, audio and video processing, and electric motor control. These chips convert real-world signals like sound, temperature, pressure, and current into digital signals, supporting applications in automotive ADAS, industrial automation, IoT sensors, and smart grids. Analog ICs are difficult to replace and have a long design cycle, making them highly sticky once integrated. Microcontrollers, often referred to as the "brains" of electronic devices, control logic and real-time computations and are present in almost all connected or electromechanical systems, including home appliances, meters, vehicle control, and medical monitoring. Texas Instruments' MSP430, C2000, and Arm-M series microcontrollers lead the market in low-power and industrial real-time control applications.

Texas Instruments serves the broadest range of customers and offers the largest product portfolio among chip manufacturers. Its performance and outlook data are considered important indicators of demand across various industries. A significant portion of its chip products are used in industrial applications and electric vehicles. Since 2024, demand from many of its industrial end customers has begun to improve, fueling optimism about overall market recovery.

Texas Instruments holds approximately 19-20% of the global analog chip market and is among the top five in the microcontroller market, with a product line covering over 40,000 embedded devices. The company supplies over 80,000 analog, power, signal chain, and microcontroller products to more than 100,000 large customers, penetrating almost all end markets, including automotive, industrial, communications, consumer electronics, and medical sectors. This extensive coverage makes its quarterly performance a key indicator of semiconductor demand, reflecting changes in downstream industry conditions. Whether driven by tariff-induced pre-buying or inventory destocking, Texas Instruments is often the first to sense and reflect these changes in its financial reports, guiding market assessments of global electronic and industrial demand trends.

During the earnings call, analysts repeatedly asked about the outlook for analog chip and microcontroller demand. The management expressed long-term optimism for all segments covered by Texas Instruments, except for the automotive market. The Chief Executive Officer emphasized that the automotive market has not yet recovered, with chip revenue in this sector significantly impacted by customer overstocking since late 2022. The post-pandemic surge in demand for automotive chips led customers to rapidly build inventory, but the subsequent tightening of monetary policy by the Federal Reserve and the global economic slowdown have weakened demand for electric vehicles. High interest rates and overcapacity have further dampened global electric vehicle demand, exacerbated by the phasing out of government subsidies for electric vehicles.

In the second quarter, Texas Instruments' revenue in China unexpectedly surged by 32%, exceeding almost all analyst expectations. However, the management expressed caution about this performance, describing it as "overheated." Consequently, the outlook for the current quarter is more conservative. Overall, second-quarter revenue grew by 16% year-over-year to 44.5 billion, with earnings per share at 1.41, also up 16% year-over-year. These results surpassed analyst expectations of 43.6 billion in revenue and 1.35 in earnings per share. Operating income for the second quarter was approximately 15.63 billion, a 25% year-over-year increase. However, the management acknowledged uncertainty about how much of this growth was driven by tariff-related "pull-forward" effects, where customers pre-ordered to avoid potential price increases due to tariffs.

Texas Instruments' dominant position in the analog chip market, which converts real-world signals into electronic signals, makes its financial data and outlook crucial indicators for many industries. The company's extensive product line and large customer base mean its performance will influence investor expectations for the broader chip industry. Long-term, the company expects sustained growth in end-chip demand, driven by the increasing integration of semiconductors into more products. However, Trump's global tariff policies have cast a shadow over industry demand, with concerns that price increases for end-chip products could hinder the recovery of chip demand since 2024. Approximately one-fifth of Texas Instruments' revenue comes from the China market, which has seen intense competition in recent years. To enhance its fundamental resilience and gain more leverage in a trade barrier environment, Texas Instruments has invested heavily in expanding production capacity and integrating generative AI modules with consumer electronics and industrial applications. The company operates four factories outside the U.S., including a large facility in China, and is accelerating the construction of new factories in the Dallas area and Utah. However, large-scale new factory construction and new equipment investments have eroded cash flow and profitability. The company has committed to refocusing on returning value to shareholders once production expansion is complete.