Can Texas Instruments Get Out of Quicksand?

NEW YORK ( TheStreet) -- Investing in the stock market can be a funny thing sometimes in that every now and then you realize you have turned negative on a company that you have spent so much of your time cheering. Regardless of conviction, patience has its limits.

This is the point to which I've arrived with semiconductor giant Texas Instruments ( TXN). On the heels of its third-quarter earnings result, I've become convinced the stock may not be going anywhere for a while.

The Quarter That Was

To its credit Texas Instruments did what it had to do during the quarter to exceed both EPS and revenue expectations. But the company also introduced more anxiety about its future growth prospects. For the third quarter, Texas Instruments reported net income of $784 million, or 67 cents per share on revenue of $3.39 billion -- beating EPS estimates of 39 cents, while topping analysts' revenue projections by $4 million.

Texas Instruments impressed analysts with year-over-year EPS growth of 31.4%. However, a decline in revenue by over 2% from the same period of a year ago is a concern. Even more glaring is that this marked the fourth consecutive quarter in which revenue has deteriorated. This even though the company saw a 6% increase year over year in orders, while also lowering inventories by $117 million.

Margins, on the other hand, arrived better than expected. The company improved gross margins sequentially by almost two points and besting its performance in the same period of a year ago by one point. Likewise, Texas Instruments logged a 40% improvement in operating income from the second quarter as it was also up 3% year over year. But investors' reaction to these numbers was a big yawn. So what's the problem?

Moving Forward

While a beat on both the top and bottom line is indeed impressive, its impact is only as good as the guidance that follows. In this case, what followed was a huge disappointment. Rich Templeton, the company's CEO had this to say about what lies ahead: "TI revenue grew sequentially and operations were well executed even though the economy and semiconductor market remained weak and likely will get weaker in the fourth quarter."

For the coming quarter, the company is projecting earnings per share of 23 cents to 31 cents - much lower than consensus estimates of 42 cents. Similarly the company's revenue range of $2.83 billion to $3.07 billion disappointed analysts, many of whom had estimates of $3.24 billion. While the uninspiring outlook is disappointing, it's hard to fault the company for its stance.

Not only is the company being affected by a tough macro climate, but it does not help that two of Texas Instruments' biggest customers, Nokia ( NOK) and Research in Motion ( RIMM), are both experiencing declining market share of their own -- making it even tougher to place chip orders. But that's only part of the problem.

That rivals such as Qualcomm ( QCOM) and Broadcom ( BRCM) continue to perform well despite the macro concerns is pretty telling and speaks to what has contributed to TI's declining sales over the past four quarters. Also intensifying the situation is the better-than-expected progress that another rival, Nvidia ( NVDA) has been making in the mobile market with its Tegra chips.

Not only has Nvidia secured design wins in Apple's ( AAPL) MacBook Pro, but the company has also acquired business from titans in Google and Microsoft ( MSFT), becoming a key component in the success of their Nexus 7 and Surface tablets. What this means is that Texas Instruments will find it increasingly more challenging to steal market share if it now falls behind Nvidia, a company that a few years ago was only known for its graphics chip.

Bottom Line

As rivals are ramping up their product portfolios and positioning themselves for a market recovery, Texas Instruments must figure out a way to secure more business and reverse its revenue slide. While the company still has a solid position in the market, I worry that the company may not have enough ammo to undo the trend of fallen orders and high inventories.

While I do believe there is considerable amount of value left in the stock, I'm also willing to consider that the stock may be stuck in quicksand for the next several quarters. On the other hand, investors might want to look at a company such as Nvidia. Not only does it seem to present better value than Texas Instruments, but it also comes with less risk -- trading at a price-to-earnings ratio 3 points lower.

At the time of publication, the author was long AAPL and held no position in any of the other stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Richard Saintvilus is a private investor with an information technology and engineering background and has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.