Texas Instruments’ stock slips as continued capacity buildout amid growing inventory weighs on outlook

Tuesday’s earnings report marked the third consecutive quarter of declining year-over-year profits and revenue at Texas Instruments, and analysts are forecasting another two quarters of the same before an estimated return to growth.

That said, analysts on the call questioned whether the company was on the right track in continuing to build out manufacturing capacity while inventories were on the rise.

Rafael Lizardi, TI’s chief financial officer, told analysts that inventory grew by $441 million from the prior quarter to $3.7 billion, and days of product inventory grew by 12 over the second quarter to 207 days, as the company shifts to direct sales.

“In the big scheme of things, our goal here is to support revenue growth,” Lizardi said. “It’s not, frankly, to optimize short-term fluctuations in gross margin. Those are not irrelevant, of course, but it’s just the focus is on supporting revenue growth in the short term, midterm, and long term, and inventory supports short-term to midterm fluctuations.”

The company forecast third-quarter earnings of $1.68 and $1.92 a share on revenue of $4.36 billion to $4.74 billion, while analysts had estimated third-quarter earnings of $1.91 a share on revenue of $4.59 billion.

Back in October, Texas Instruments said it would keep focusing on building out capacity while forecasting declining sales and earnings going forward.

In 2020, as the COVID pandemic struck, a shift to working and schooling from home drove such high demand in chips that auto makers and industrial customers experienced huge shortages because of a lack of available manufacturing capacity. Last year, however, that chip shortage flipped to a uneven chip glut, stoking criticism of the company’s current buildout.

The company reported second-quarter net income of $1.72 billion, or $1.87 a share, compared with $2.29 billion, or $2.45 a share, in the year-ago period. Revenue declined to $4.53 billion from $5.21 billion in the year-ago period, as analog revenue fell 18% to $3.28 billion and embedded revenue rose 9% to $894 million.

Analysts surveyed by FactSet had forecast earnings of $1.76 a share on revenue of $4.37 billion.

Analysts had forecast sales of analog electronics, which convert real-world data such as sound or temperature into digital data, to fall to $3.62 billion, and sales of embedded processors, which take that digital data and use it to perform specific tasks, to decline 0.6% to $815.7 million.

Year to date, Texas Instruments’ stock price has gained 13%, while shares of another major auto-chip supplier, NXP Semiconductors NV
NXPI,
+4.27%,
which reported earnings late Monday, have rallied 39%.

In comparison, the S&P 500
SPX,
+0.28%
has gained 19%, the tech-heavy Nasdaq Composite Index
COMP,
+0.61%
has rallied 35% and the PHLX Semiconductor Index
SOX,
+1.70%
has soared 48% this year.