This column was originally published on RealMoney on July 25 at 10:52 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.After last week's slightly ambivalent comments from Nokia ( NOK) and Qualcomm ( QCOM), investors were relieved to see Texas Instruments ( TXN) nail both revenue and earnings numbers cleanly. Monday evening, TI reported EPS at 47 cents, meeting estimates, and revenue at $3.7 billion vs. a $3.68-billion consensus. The results were enough to trigger a short-covering rally on Tuesday; TI shares were recently up 5% to $29.24. But is it enough to carry the stock anywhere close to its spring heights? I don't believe so. Telecom investors looking for an inflection point may have found it. The handset guidance landscape is muted, and the emergence of certain pockets of weakness in the mobile network market does not seem to be a coincidence.
Now, the Texas Instruments guidance cuts the middle of the consensus range with a surgical precision. The midpoint of the revenue guidance range is $3.79 billion vs. the $3.82 billion analyst consensus. The midpoint of the EPS guidance is 45 cents vs. the analyst consensus of 45 cents. At 67 days, inventory level stayed flat with the end of the previous quarter -- this was a genuine relief after inventory worries roiled the markets over the past month. But no matter how relieved investors will be on Tuesday, the Texas Instruments guidance was clearly closer to the tepid Qualcomm guidance issued last week than the jubilant optimism both mobile chip giants offered three months earlier.
I will go out on a limb here and predict phone market volume growth will begin to decelerate faster than modeled during the third quarter. Companies like Texas Instruments, Qualcomm and Nokia are detecting early signs of this, and it is having an impact on their forward-looking commentary. We all know that the pace of the unit growth is set to decelerate over the second half of 2006 -- that's priced in. The issue is whether the growth slows down faster than anticipated. Actual unit contraction is not likely to happen before spring of 2007, if even then. But share prices will make the big cycle moves before growth dips anywhere near zero -- that's the tough part. Just look at the PC market, devastated even while PC unit sales growth remains above 10% year over year. We are probably already in a telecom bear market, and I expect the short-covering rallies to be violent and brief. This handset sector earnings season was strong enough to trigger short covering, but not strong enough to offer a base for a confident rally to challenge the spring highs. Nortel ( NT) is now down from $3 to $2 in just a few months, and this company has been the canary in the telecom mineshaft before; it led the sector up during the slowly building telecom stealth rally at the end of 2002. I believe the mobile telecom sector overall is going to face some stiff challenges in the second half of 2006.