3 Reasons TXN is Risky and 1 Stock to Buy Instead

Texas Instruments has had an impressive run over the past six months as its shares have beaten the S&P 500 by 7.4%. The stock now trades at $211.38, marking a 13.1% gain. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is there a buying opportunity in Texas Instruments, or does it present a risk to 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 glad investors have benefited from the price increase, but we don't have much confidence in Texas Instruments. Here are three reasons why there are better opportunities than TXN and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Regrettably, Texas Instruments’s sales grew at a sluggish 2.6% compounded annual growth rate over the last five years. This fell short of our benchmarks. 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 one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.

Looking at 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. Its operating margin for the trailing 12 months was 34.3%.

3. Free Cash Flow Margin Dropping

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, Texas Instruments’s margin dropped by 32.1 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’s free cash flow margin for the trailing 12 months was 9.1%.

Final Judgment

Texas Instruments’s business quality ultimately falls short of our standards. With its shares topping the market in recent months, the stock trades at 36.5× forward P/E (or $211.38 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. We’d suggest looking at a top digital advertising platform riding the creator economy.

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