Investors Are Betting Too Much on Texas Instruments Incorporated (TXN)

This is disappointing coming from a company with such a strong brand. Plus, that customers are reluctant to spend is not reflective of a broad sector issue. This was not evident according to Qualcomm’s report. Nor was it felt by Broadcom Corporation (NASDAQ:BRCM), which just posted 14% increase in revenue and $251 million in net income. Both figures topped analysts’ estimates.

While Broadcom’s strong performance supports the premium investors are paying for the stock, why  are shares of Texas Instruments trading at a P/E of 22.45, whereas Qualcomm’s is 17.71? For that matter, that these shares are trading at double the P/E ratio of Intel is too much of a wager by investors. Especially since Texas Instruments just issued revenue guidance that represents 6% sequential decline, arriving well below Street estimates.

As rivals are ramping up product portfolios and positioning for a market recovery, Texas Instruments is stuck figuring out ways to reverse its revenue slide, which has now spanned five quarters. And thus far, the company has not shown that it can stop the bleeding. Unlike Broadcom and Qualcomm, Texas Instruments does not have the strong relationship with device manufacturers such as Apple Inc. (NASDAQ:AAPL) and Samsung. This means the bleeding is likely to continue.

Still scratching my head
The relationships with Apple and Samsung means that Broadcom and Qualcomm enjoy a combined 50% exposure to the smartphone market. This is even though mobile devices only represent a portion of their respective revenue. Plus, Intel is beginning to gain ground in this area. Although this has been a popular cited bear argument against Intel, that’s not so much the case anymore.

The company has spent 14% more in research and development helping to shore up its mobile position. As a result, Intel is expected to unveil LTE-compatible chips later in the year. These chips will allow the company to power more smartphones and seek more growth opportunities in tablets, whereas Texas Instruments has had no such plans.

For these shares to make sense in the long term, I think Texas Instruments needs to be more “instrumental” in mobile. In the meantime, while I do believe that Texas Instruments deserves the benefit of the doubt, I’m nonetheless amazed by its price. If these shares were at least trading on par with Qualcomm, it would not be as big of a deal. All things being equal, the stock is overvalued by 15%. That it still carries this level of premium is a head-scratcher.

The article Investors Are Betting Too Much on Texas Instruments originally appeared on Fool.com and is written by Richard Saintvilus.

Fool contributor Richard Saintvilus owns shares of Apple. The Motley Fool recommends Apple and Intel. The Motley Fool owns shares of Apple, Intel, and Qualcomm.

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