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Atheros And Texas Instruments - Chips Ahoy
Atheros (Nasdaq:ATHR) and Texas Instruments (NYSE:TXN) are indeed very different kinds of chip companies, but there are basically in the same boat today. The big rebound in chip demand is over, demand and supply are basically back in alignment and investors are probably looking at a couple quarters of uninspiring performance before growth returns.
The Quarters That Were
Atheros reported 4% sequential sales growth, as an exceptionally strong result in the consumer business offset weakness in PCs and networking. Inventories rose by 10% on a sequential basis, and the company trimmed fourth quarter guidance by about 10% relative to prior expectations. While the company has quality customers like Hewlett Packard (NYSE:HPQ) and Amazon (Nasdaq:AMZN), consumer products cannot fully compensate for the weaker PC and networking environment. Atheros is still small enough that individual product delays like the pushout of Nintendo's 3DS still matter.
For the far larger Texas Instruments, sales were up a similar amount - 7% on a sequential basis. TI did see an improvement in gross margins, though. Performance was strongest in high-performance analog, but a 0.92 book-to-bill is not encouraging, and it looks like TI is in for a couple of quarters of sequential revenue declines. That is broadly consistent with what Linear Technology (Nasdaq:LLTC), another major analog player, has been saying and TI management does not seem to see anything unusual in this mid-cycle slowdown. (For more, see Is Linear A Canary Or A Duck?)
The Road Ahead
Interestingly, Atheros and TI have at least one concern in common - namely, rising competition from Intel (Nasdaq:INTC) and Broadcom (Nasdaq:BRCM). For Atheros, the challenge is largely about fending off competition in wireless LAN, building the Ethernet business and figuring out how to expand and diversify the business. For TI, competition is likewise an ever-present threat, even as the company looks to grow with chips in smartphones made by Nokia (NYSE:NOK), Motorola (NYSE:MOT) and Palm (now part of HP).
Looking more broadly, it was inevitable that there would be a chip slowdown. Once demand returned, chip companies ramped up production and customers over-ordered to get the chips they needed. Now the supply has more than caught up to demand, and companies are seeing sequential revenue declines on the horizon as lead times have shrunk and customers no longer need to over-order to get what they need. (For more, see Measuring Company Efficiency.)
The Bottom Line
Texas Instruments is certainly a high-quality company, but its fortunes as an investment will likely track overall sentiment for semiconductors, as it has for years (though TI has outperformed its indexes, and may continue to do so). Atheros has more of an opportunity to outperform, but also more risk as well. Neither is all that expensive today, but buyers will have to be patient and aware of the risk that this slowdown could be deeper and/or longer than current estimates suggest. (For more, see The Characteristics Of A Successful Company)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
The Quarters That Were
Atheros reported 4% sequential sales growth, as an exceptionally strong result in the consumer business offset weakness in PCs and networking. Inventories rose by 10% on a sequential basis, and the company trimmed fourth quarter guidance by about 10% relative to prior expectations. While the company has quality customers like Hewlett Packard (NYSE:HPQ) and Amazon (Nasdaq:AMZN), consumer products cannot fully compensate for the weaker PC and networking environment. Atheros is still small enough that individual product delays like the pushout of Nintendo's 3DS still matter.
For the far larger Texas Instruments, sales were up a similar amount - 7% on a sequential basis. TI did see an improvement in gross margins, though. Performance was strongest in high-performance analog, but a 0.92 book-to-bill is not encouraging, and it looks like TI is in for a couple of quarters of sequential revenue declines. That is broadly consistent with what Linear Technology (Nasdaq:LLTC), another major analog player, has been saying and TI management does not seem to see anything unusual in this mid-cycle slowdown. (For more, see Is Linear A Canary Or A Duck?)
Interestingly, Atheros and TI have at least one concern in common - namely, rising competition from Intel (Nasdaq:INTC) and Broadcom (Nasdaq:BRCM). For Atheros, the challenge is largely about fending off competition in wireless LAN, building the Ethernet business and figuring out how to expand and diversify the business. For TI, competition is likewise an ever-present threat, even as the company looks to grow with chips in smartphones made by Nokia (NYSE:NOK), Motorola (NYSE:MOT) and Palm (now part of HP).
Looking more broadly, it was inevitable that there would be a chip slowdown. Once demand returned, chip companies ramped up production and customers over-ordered to get the chips they needed. Now the supply has more than caught up to demand, and companies are seeing sequential revenue declines on the horizon as lead times have shrunk and customers no longer need to over-order to get what they need. (For more, see Measuring Company Efficiency.)
The Bottom Line
Texas Instruments is certainly a high-quality company, but its fortunes as an investment will likely track overall sentiment for semiconductors, as it has for years (though TI has outperformed its indexes, and may continue to do so). Atheros has more of an opportunity to outperform, but also more risk as well. Neither is all that expensive today, but buyers will have to be patient and aware of the risk that this slowdown could be deeper and/or longer than current estimates suggest. (For more, see The Characteristics Of A Successful Company)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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