Texas Instruments slips as Oppenheimer downgrades, citing margin worries
wellesenterprises/iStock Editorial via Getty Images
Texas Instruments (NASDAQ:TXN) shares fell more than 1% in pre-market trading on Wednesday as investment firm Oppenheimer downgraded the analog semiconductor company, citing concerns over gross margins.
"In the near/medium term, we see sustained margin pressure as [management] invests in capacity; GM pressured for next few yrs by combination of under-utilization, increased depreciation and aggressive commodity PMIC pricing in China (~20% sales)," analyst Rick Schafer wrote in an investor note. 
"In our view, TI's battle of attrition w/smaller suppliers in China could persist for the foreseeable."
As a result, he expects gross margins to drop 120 basis to 63% in the third quarter, which would result in a roughly 720 basis point decline since the first quarter of 2022, due in part to underutilization and depreciation charges related to incremental capacity. The company's management has also said it expects capital spending to be roughly $5B per year through 2026, which is likely to negatively impact both margins and free cash flow, Schafer said.
Schafer cut his rating on Texas Instruments (TXN) shares to perform from outperform and removed the $195 price target.
Delving deeper, Schafer said that he expects Texas Instruments (TXN), which reports third-quarter results on October 24, to see flat growth in its industrial segment, which accounts for roughly 40% of revenue, as global PMI figures and trends "closely align w/industrial health." He believes the industrial segment likely gets out of a correction in the first half of 2024, citing some encouraging data out of China.
Automotive, which is 25% of revenue, is expected to be up roughly 3% in the third quarter, negatively impacted by softer electric vehicle demand in China and spreading weakness. 
Conversely, personal electronics, which are 20% of sales, are expected to be up "a bit" seasonally in the third quarter. 
"Colored by our channel checks, we believe [Texas Instruments] benefits from modest seasonal handset refresh offset by underwhelming 'back-to-school' PC/tablet," Schafer wrote. 
Communications equipment, which is 7% of sales, is expected to see an uptick next year. 
Analysts are largely cautious on Texas Instruments (TXN). It has a BUY rating from Seeking Alpha authors, while Wall Street analysts rate it a HOLD. Conversely, Seeking Alpha's quant system, which consistently beats the market, rates TXN a HOLD.