Ouch: Worry About Semis After Texas Instruments

Texas Instruments (NYSE:TXN) had a massive guide down on earnings. Ouch, that was big. The amazing thing was every sell-side analyst on that call was in deer-in-headlights disbelief. Texas Instruments sells into everybody. They said everybody's putting on the breaks. And nobody believes them? I expect another shoe to drop.

First, The Numbers, Ouch

Source: Elazar Advisors Model with data pulled form Texas Instruments Earnings Reports

The company had said down cycles usually last 4-5 quarters. They said in one fast comment last night, this downcycle is now going to take longer.

Look at the slowdown of revenue growth since Q2 2018. 8.8% in Q2 '18 and from there the growth rate just kept slowing. The growth rates kept dropping. And the guide is that growth rate will get even worse.

This is a terrible trend.

When I look for companies to buy this is the first thing I look at. What's the trend of revenue growth? Is it accelerating or decelerating. If it's accelerating that's exciting especially when it comes to tech.

But decelerating for this many quarters in a row is, ouch, no good. Be careful.

Macro "Traffic Jam" Slowdown

Listen to how rough this company described what's going on during their earnings call. This was the biggest comment, for me on the conference call.

"And if you think about when there is tensions in trade and obstacles to trade, what do businesses do? They become more cautious and they pull back. And we are at the very end of our long supply chain and when the ones at the very front pullback, it becomes a traffic jam."

I've never heard a company say "traffic jam" but I have a new rule. Any time I hear a company say "traffic jam" good or "traffic jam" bad, I'm going to have to listen. I have my new 'traffic jam' indicator and it's flashing no good.

So many analysts on the call were trying to pin the problems on company specific reasons. They were in disbelief. Shocker right? Multi-year trade tensions are causing a slowdown. No way, right? No, I think it's believable.

That tells me analyst numbers are probably too high on Texas Instruments' peers as well.

But Texas Instruments just kept saying the slowdown is broad based in many industries, regions and customers.

It's tough not to make a mental note and say, "You know what, If I don't have a ton of confidence for an upcoming earnings, maybe I should be on the more cautious side."

Risk Reward Not Amazing

Even with the post-earnings slide, the stock's still "up there." So there's risk for further follow through especially with this multi-quarter slowdown.

That's probably true for semis in general. Here's the SMH.

I think the Texas Instruments report is maybe more of an economic read than a semi read. But still when companies are in a traffic jam putting the brakes on, it can probably show its face in other earnings reports.

Here's the SMH (NYSEARCA:SMH) holdings.

Texas Instruments was the third largest in the SMH. It can weigh on the SMH. But I also think the news is a heads up to have a little more caution going into other earnings reports later in earnings season. This sign can probably carry over to the economy as a whole as well.

Conclusion

The Texas Instruments report was a shocker. The numbers were a big guide down. Don't expect a turn so fast. But the analyst reaction of disbelief tells me there's more shoes to drop. Street numbers are probably too high. Trying to pin reasons on something company specific doesn't make sense when Texas Instruments is talking about broad based weakness. Caution is in order.