Texas Instruments (TXN.US) released third-quarter results and fourth-quarter guidance that both surpassed Wall Street expectations, with demand improving simultaneously across the industrial, automotive, and data center end markets, driving significant growth in revenue and gross margin.
Following the earnings release, major investment banks including Morgan Stanley, JPMorgan, Jefferies, and Bernstein all raised their price targets, but institutions remain divided on the sustainability of the analog chip industry recovery, the company's valuation, and future capital expenditure.
Texas Instruments shares rose in pre-market trading on Thursday before erasing all gains after the open, and are currently down 0.81%.
Texas Instruments reported third-quarter revenue of $6.055 billion, up approximately 28% year-over-year and about 11% quarter-over-quarter, exceeding the market expectation of $5.921 billion.
Earnings per share came in at $2.62, also beating the market expectation of $2.41.
Gross margin reached 64.2%, up about 2.8 percentage points from 61.4% in the second quarter and about 2.4 percentage points above the market expectation of 61.8%, making it one of the most prominent highlights of the earnings report.
From a business segment perspective, the analog chip division generated third-quarter revenue of $4.911 billion, up approximately 32% year-over-year and about 13% quarter-over-quarter.
The embedded processing business reported revenue of $858 million, up approximately 21% year-over-year.
In terms of end markets, the data center business delivered the strongest performance, with revenue growing approximately 95% year-over-year and about 20% quarter-over-quarter.
Industrial business revenue grew more than 40% year-over-year and about 10% quarter-over-quarter.
Automotive business revenue grew approximately 15% year-over-year and about 10% quarter-over-quarter.
Texas Instruments expects fourth-quarter revenue of approximately $6.05 billion, above the market expectation of about $5.73 billion.
The midpoint of its earnings per share guidance is $2.62, also above the market expectation of approximately $2.26.
Bernstein noted that the implied fourth-quarter gross margin is approximately 64%, higher than the market expectation of 61.2%.
Considering that the fourth quarter typically sees a seasonal slowdown in demand, the company's guidance for essentially flat revenue quarter-over-quarter is also notably better than historical seasonal patterns.
Morgan Stanley analyst Joseph Moore raised his price target on Texas Instruments from $255 to $278 but maintained an "Underweight" rating.
He noted that the company's gross margin improvement exceeded expectations, primarily benefiting from revenue growth and higher capacity utilization, with product pricing and business mix improvement also contributing.
However, Moore believes the overall analog chip industry recovery is still at a relatively early stage.
Although recovering industrial demand, low automotive customer inventories, and continued data center business expansion are all positive factors, there has not yet been the widespread and urgent chip supply shortage seen in 2021 to 2022.
Morgan Stanley pointed out that Texas Instruments' inventory days still stand at 194 days, close to the 200-day level.
Meanwhile, the contribution of product price increases in the second half of 2026 to performance remains limited, but as annual price negotiations progress in 2027, pricing factors could become a more important driver of future margin improvement.
Moore also acknowledged that as industry supply tightens, Texas Instruments' previously large-scale manufacturing capacity buildout could translate into a competitive advantage.
The company can meet customer demand by adding equipment and expanding production, thereby gaining more market share.
However, capacity expansion also means additional investment, and the extent to which new revenue ultimately converts into free cash flow remains uncertain.
Texas Instruments maintained its 2026 capital expenditure guidance of $2 billion to $3 billion, with actual spending potentially near the upper end of the range.
Management plans to provide a 2027 capital expenditure outlook in its capital management update in February next year.
Morgan Stanley believes spending next year may remain at a similar level, and therefore continues to prefer Analog Devices (ADI.US), which has lower capital intensity and higher return on invested capital.
In contrast, Jefferies analyst Blayne Curtis is more optimistic about Texas Instruments' future growth prospects, raising his price target from $260 to $300 and maintaining a "Hold" rating.
Curtis noted that Texas Instruments' industrial business revenue has returned to its 2022 historical peak, but more than half of the company's business has yet to recover to previous highs, meaning this cyclical recovery still has room for further development.
He believes that as large cloud computing companies continue to increase capital expenditure, Texas Instruments' data center business is expected to continue expanding, while application-specific chip products ramping up next year could also bring additional market share gains.
Coupled with low automotive industry customer inventories and potential benefits from 2027 product pricing negotiations, the company is expected to sustain its growth momentum into 2027.
JPMorgan analyst Harlan Sur similarly believes that Texas Instruments' upcycle still has room to continue, and raised his price target from $340 to $365.
Sur said that Texas Instruments' third-quarter results and fourth-quarter guidance both significantly exceeded market expectations, reflecting simultaneous growth and accelerating improvement in demand across the three core markets of industrial, automotive, and data center.
In addition, product pricing is beginning to provide modest support, and the company's continuously strengthening capacity advantages position it favorably amid gradually tightening analog chip supply.
He believes these factors will jointly determine Texas Instruments' revenue growth, margins, and free cash flow performance over the coming years.
Bernstein analyst Stacy Rasgon raised his price target on Texas Instruments from $290 to $310 while maintaining a "Market-Perform" rating.
The firm believes the company's industrial and data center businesses remain strong, automotive business prospects are improving, and gross margins are approaching levels seen before the previous capital expenditure expansion cycle began.
Bernstein therefore significantly raised its earnings forecasts, increasing its 2026 revenue estimate from $21.7 billion to $22.4 billion and its 2027 revenue estimate from $23.2 billion to $26.5 billion.
Its 2027 earnings per share estimate was raised from $9.16 to $11.73.
However, Bernstein simultaneously lowered its target valuation multiple from 30x to 25x, believing that with rising earnings expectations, Texas Instruments' current valuation has gradually approached a reasonable level for the mid-cycle of the industry.
The firm noted that how long the industrial demand recovery can last, when the data center business can become a more significant revenue source, and how much capital expenditure future capacity expansion will require remain questions investors need to watch.
Overall, Texas Instruments' latest earnings report further confirms that the analog chip industry demand recovery is expanding from the industrial sector to the automotive and data center markets.
In particular, data center revenue nearly doubling and gross margin improving beyond expectations provided the basis for Wall Street to raise earnings forecasts.
However, with the company's stock price having risen substantially this year, market focus is gradually shifting from short-term performance improvement to the sustainability of the recovery and whether new capacity investment can generate sufficient free cash flow returns.
This also explains why, despite multiple investment banks raising their price targets, there remains notable divergence in investment ratings on Texas Instruments.
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