Texas Instruments (TXN)

Analog chip manufacturer Texas Instruments (NASDAQ:TXN) reported Q1 CY2025 results exceeding the market’s revenue expectations, with sales up 11.1% year on year to $4.07 billion. On top of that, next quarter’s revenue guidance ($4.35 billion at the midpoint) was surprisingly good and 5.1% above what analysts were expecting. Its GAAP profit of $1.28 per share was 20.2% above analysts’ consensus estimates.

Company Overview

Headquartered in Dallas, Texas since the 1950s, Texas Instruments (NASDAQ:TXN) is the world’s largest producer of analog semiconductors.

Texas Instruments’ peers and competitors include Analog Devices (NASDAQ:ADI), Skyworks (NASDAQ:SWKS), Infineon (XTRA:IFX), NXP Semiconductors NV (NASDAQ:NXPI), ON Semi (NASDAQ:ON), and Microchip (NASDAQ:MCHP).

Longer manufacturing duration allows analog chip makers to generate greater efficiencies, leading to structurally higher gross margins than their fabless digital peers. The downside of vertical integration is that cyclicality can be more pronounced for analog chipmakers, as capacity utilization upsides work in reverse during down periods. Read More. The semiconductor industry is broadly divided into analog and digital semiconductors. Digital chips are what most people think of as the brains of almost every electronic device. Their primary purpose is to either store (memory chips) or process (CPUs/GPUs) data. By comparison, analog chips regulate real world signals, such as temperature, speed, sound, or electrical current, converting them into a stream of digital data that can be processed by digital semiconductors. Analog semiconductors are also used to manage power in any electronic device; they convert, store and distribute the electrical energy that comes from a battery or wall plug. Analog chips are found everywhere from household appliances like refrigerators or washing machines, to smartphones, cars and factory production lines.

A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, Texas Instruments’s 2.6% annualized revenue growth over the last five years was sluggish. This was below our standards and is a poor baseline for our analysis. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

We at StockStory place the most emphasis on long-term growth, but within semiconductors, a half-decade historical view may miss new demand cycles or industry trends like AI. Texas Instruments’s performance shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 9.3% annually.

This quarter, Texas Instruments reported year-on-year revenue growth of 11.1%, and its $4.07 billion of revenue exceeded Wall Street’s estimates by 4.1%. Adding to the positive news, Texas Instruments’s growth inflected positively this quarter, news that will likely give some shareholders hope. Company management is currently guiding for a 13.8% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 9.1% over the next 12 months, an improvement versus the last two years. This projection is above average for the sector and suggests its newer products and services will catalyze better top-line performance.

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business’ capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

This quarter, Texas Instruments’s DIO came in at 243, which is 70 days above its five-year average, suggesting that the company’s inventory levels are higher than what we’ve seen in the past.

Gross profit margin is a key metric to track because it shows how much money a semiconductor company gets to keep after paying for its raw materials, manufacturing, and other input costs.

Texas Instruments’s gross margin is well ahead of its semiconductor peers, and its strong pricing power is an output of its differentiated, value-add products. As you can see below, it averaged an excellent 59.6% gross margin over the last two years. Said differently, roughly $59.55 was left to spend on selling, marketing, R&D, and general administrative overhead for every $100 in revenue.

Texas Instruments’s gross profit margin came in at 56.8% this quarter, in line with the same quarter last year. On a wider time horizon, Texas Instruments’s full-year margin has been trending down over the past 12 months, decreasing by 3 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs (such as raw materials and manufacturing expenses).

Texas Instruments has been a well-oiled machine over the last two years. It demonstrated elite profitability for a semiconductor business, boasting an average operating margin of 37.1%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Texas Instruments’s operating margin decreased by 8.4 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.

In Q1, Texas Instruments generated an operating profit margin of 32.5%, down 2.6 percentage points year on year. Since Texas Instruments’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Texas Instruments’s flat EPS over the last five years was below its 2.6% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded due to non-fundamental factors such as interest expenses and taxes.

Diving into the nuances of Texas Instruments’s earnings can give us a better understanding of its performance. As we mentioned earlier, Texas Instruments’s operating margin declined by 8.4 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q1, Texas Instruments reported EPS at $1.28, up from $1.20 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Texas Instruments’s full-year EPS of $5.27 to grow 5.7%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Texas Instruments has shown weak cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 8.1%, subpar for a semiconductor business. The divergence from its good operating margin stems from its capital-intensive business model, which requires Texas Instruments to make large cash investments in working capital and capital expenditures.

Taking a step back, we can see that Texas Instruments’s margin dropped by 30.4 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. Almost any movement in the wrong direction is undesirable because of its relatively low cash conversion. If the longer-term trend returns, it could signal it’s becoming a more capital-intensive business.

Texas Instruments broke even from a free cash flow perspective in Q1. This result was good as its margin was 6 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings. Long-term trends are more important.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Texas Instruments hasn’t been the highest-quality company lately because of its poor top-line performance, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 49.5%, splendid for a semiconductor business.

Texas Instruments reported $5.01 billion of cash and $12.85 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $6.72 billion of EBITDA over the last 12 months, we view Texas Instruments’s 1.2× net-debt-to-EBITDA ratio as safe. We also see its $264 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Texas Instruments blew past analysts’ EPS expectations this quarter. We were also glad its revenue guidance for next quarter exceeded Wall Street’s estimates. Zooming out, we think this quarter featured some important positives. The stock traded up 4.7% to $159.03 immediately after reporting.

Updated: May 21, 2025 at 10:21 PM EDT

Are you wondering whether to buy Texas Instruments or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

Texas Instruments isn’t a terrible business, but it doesn’t pass our quality test. For starters, its revenue growth was weak over the last five years. And while its impressive operating margins show it has a highly efficient business model, the downside is its cash profitability fell over the last five years. On top of that, its declining operating margin shows the business has become less efficient.

Texas Instruments’s P/E ratio based on the next 12 months is 32.2x. This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better investment opportunities out there.

Wall Street analysts have a consensus one-year price target of $178.55 on the company (compared to the current share price of $185.70), implying they don’t see much short-term potential in Texas Instruments.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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