Texas Instruments has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 7.4% to $301.68 per share while the index has gained 7.2%.
Is now the time to buy Texas Instruments, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why is Texas Instruments not exciting?
We’re sitting this one out for now. Here are three reasons why there are better opportunities than TXN, plus one stock we’d rather own.
1. Long-term revenue growth disappoints
Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, Texas Instruments’s 3.4% annualized revenue growth over the last five years was mediocre. This fell short of our benchmark for the semiconductor sector. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
2. Shrinking operating margin
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Analyzing the trend in its profitability, Texas Instruments’s operating margin decreased by 11.1 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 40.8%.
3. EPS growth has stalled
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Texas Instruments’s flat EPS over the last five years was below its 3.4% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
Final judgment
Texas Instruments isn’t a terrible business, but it doesn’t pass our bar. That said, the stock currently trades at 27.4× forward P/E (or $301.68 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We’re pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at the most dominant software business in the world.
Stocks we would buy instead of Texas Instruments
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