Texas Instruments (NASDAQ:TXN) reported fourth-quarter earnings on Jan. 22. Although the numbers beat the company’s guidance, weak market conditions for its products — due in large part to reliance on China — resulted in year-over-year declines across the board.
After an initial pop, TXN stock quickly went in the opposite direction, losing 10% over the next week. However, the stock began a recovery to start off February. With its Thursday close at $128.70, TXN has nearly recovered.
The question remains whether TXN can return to its record high of $134.25, set just prior to that earnings report. And the bigger question is whether demand for Texas Instruments’ products will continue to be soft in 2020 or see a return to growth.
Texas Instruments’ Q4 Earnings Reflects Soft Demand
When Texas Instruments delivered its Q4 2019 earnings in January, the company beat Wall Street estimates on both revenue and earnings. Texas Instruments also noted that it had returned $6 billion to shareholders through 2019 in the form of dividends and stock repurchases. While the beat gave investors some hope — and probably resulted in the 0.68% pop in TXN stock the following day — the numbers highlighted soft demand for the company’s products.
That is cause for concern. It not only resulted in a 10% drop for the stock over the next week, it’s also weighing on analyst projections for 2020 performance.
Revenue was down 9.5% year-over-year, net income was down 13.71% compared to Q4 2018, operating profit dropped 17.76% YOY and earnings per share was off by 11.81% compared to the same quarter the previous year.
It was a similar story in Q3, although the decline accelerated in all key areas in Q4. That begs the question: after a year of soft demand, will 2020 see a return to revenue growth for Texas Instruments?
The China Factor
Texas Instruments is primarily a semiconductor company, and it relies on China for a large percentage of its revenue. That goes a long way toward explaining TXN’s performance last year — and provides hints about what to expect in 2020.
With 43% of its revenue tied directly to the Chinese market, Texas Instruments joins a group of American chipmakers, including Qualcomm (NASDAQ:QCOM) and Micron (NASDAQ:MU), that have seen their stock performance ride the roller coaster of U.S. and China trade relations.
A low point came in the fall of 2018, when the trade war between the two countries kicked off in earnest. When the U.S. hit China with tariffs on $200 billion in goods, TXN dropped 14% in a single month. Last May, when President Trump announced the tariff rate on those goods would increase to 25%, TXN dropped 12% in a matter of weeks.
But as trade relations showed signs of thawing, semiconductor stocks — including Texas Instruments — saw strong growth. After the two countries announced they had reached a “phase one” trade deal and would start work immediately on “phase two,” TXN stock got an immediate lift, culminating with its record $134.25 close on Jan. 23.
As we’ve seen from the trade war, Texas Instruments’ exposure to China comes with risk. Last fall, it was reported that the country’s economic growth slowed to its lowest level in 27 years.
Then there is coronavirus. In its guidance, Texas Instruments called out “health conditions” in countries in which it or its customers and suppliers operate as being a risk. The coronavirus outbreak in China has wreaked havoc, and is hammering China’s economy. Chipmakers like Texas instruments could not only see demand for their products fall in China itself, but with Chinese factories closing or slowing production, other companies that use TXN components may reduce their orders.
Bottom Line on TXN Stock
Unless the situation in China improves — with ongoing trade normalization and a speedy resolution of the coronavirus outbreak — the prospects for Texas Instruments turning around amid declining revenue and earnings in 2020 are slim. Its high exposure to the Chinese market means the odds for TXN stock returning to record highs in 2020 will be just as slim.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.