On Thursday, Texas Instruments (TXN) updated its business outlook for the fourth quarter of 2011, and the revisions weren’t good. The chip maker reduced its top-line revenue guidance to $3.19 – $3.33 billion compared with the previous range of $3.26 – $3.54 billion and cut its EPS guidance for the quarter to $0.21 – $0.25 from $0.28 – $0.36 per share. Despite the reduced expectations in the quarter, we are sticking with our fair value estimate for Texas Instruments, as we believe such a disappointment will only be temporary.
Texas Instruments noted that its revisions were prompted by broadly lower demand across a wide range of markets, customers and products, except for wireless applications processors—particularly its OMAP 4 processor, which is embedded in Samsung’s Nexus and Galaxy S II smartphones, Motorola’s Droid Bionic and Razr smartphones, LG’s Thrill smartphone, Amazon’s (AMZN) Fire tablet and Barnes & Noble’s Nook tablet. Texas Instruments also indicated that it is experiencing a negative mix shift that is pressuring profitability, as demand for higher-margin areas (analog and embedded processing products) are coming in lower than management expectations.
The weak performance in the chip space from Texas Instruments was reinforced by a negative pre-announcement from Lattice Semi (LSCC) on Friday morning and Altera (ALTR) after the close Thursday. Lattice Semi expects fourth-quarter revenue to decline 14% to 17% sequentially (versus a decline of 4% to 9% previously), noting softness in its communication business. With respect to Altera, the firm expects fourth-quarter revenue to be 13% to 16% lower than third-quarter levels (versus a decline of 7% to 11% previously), noting weakness across all major vertical markets, including both large and small customers. We are also sticking with our fair value estimate for Altera, despite the downward revision.
Though we remain aware of the risks of weaker demand in the chip space, we continue to think Intel (INTC) remains one of the best plays available in the market today based on its significant undervaluation and attractive dividend yield. We are considering increasing our position in Intel in the portfolio of our Best Ideas Newsletter on any material weakness in the shares.
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