The earnings season began on a mixed note for the semiconductor sector. Micron Technology (MU) reported weaker EPS (earnings per share) guidance for the November 2019 quarter on September 26, which shrunk the stock. And, the weak guidance came on the back of falling memory prices. The stock has not yet recovered.
On October 17, the world’s largest foundry, Taiwan Semiconductor Manufacturing Company Limited (TSM), reported earnings and guidance beat on the back of strong demand for its 7nm (nanometer) process node. Additionally, the company saw strong demand in smartphones and high-performance computing end-markets.
Semiconductor stocks in focus this week
Chip stocks will witness strong momentum this week. This is because major chip companies Texas Instruments (TXN), Intel Corp. (INTC), Xilinx (XLNX), Teradyne Inc. (TER), and Lam Research Corp. (LRCX) released their earnings. As seen from the above graph, stocks of all the above companies fell last week ahead of their financial release.
If we look at the previous quarter earnings season, only Texas Instruments and Teradyne stocks rose after the financial release as they reported earnings beat. However, Xilinx, Intel, and Lam Research stocks fell after the earnings on weaker guidance. What should investors expect from the upcoming earnings?
Will Texas Instruments’ stock repeat last earnings rally?
Texas Instruments is the world’s largest analog chipmaker. Analog chips convert real-world inputs like sound and touch into digital signals. They are found inside any device with an “on switch.” Also, it makes power management products, processors, microcontrollers, and connectivity products. The company’s broad market makes it a barometer of the semiconductor industry’s health.
Texas Instruments is set to report its third-quarter earnings on October 22. Its stock rose 7% a day after its second-quarter earnings beat estimates. The earnings were not as bad as investors’ thought amidst the US-China trade war. We expect history to repeat itself on October 23.
For the third quarter, Texas Instruments expects revenue to rise 2.7% sequentially to $3.8 billion as it will include orders for Apple’s iPhone components. TSM earnings showed that there is strong demand from the smartphone market, especially Apple. We expect Texas Instruments to once again beat revenue estimate by $100 million. Also, we expect the company to report revenues of $3.9 billion in the third quarter.
Xilinx supplies circuits for fast computing industry
Xilinx supplies programmable integrated circuits to a vast majority of industries that need fast computing. Fast computing includes data centers, communications, and automotive. Additionally, the stock rose 8.6% YTD (year-to-date). This shows that it’s underperforming the VanEck Vectors Semiconductor ETF (SMH), which rose 39% YTD.
Xilinx was among the few companies that reported YoY (year-over-year) growth even in a semiconductor downturn. However, despite earnings growth, the stock fell as it reached its all-time high of $141.6 in April. This shows that investors had already priced in strong earnings growth. Also, it shows that the company’s actual growth was lower than investors’ estimates.
Bearish sentiments surround Xilinx Q2 2020 earnings
In the fiscal 2020 first-quarter financial release, Xilinx stock fell 5.3% on disappointing guidance for the second quarter of fiscal 2020. The company guided revenues were $825 million at the midpoint. This represents a sequential decline of 2.9%. Also, it marks its first sequential decline in two years. This disappointing guidance comes on the back of the US ban on Huawei, one of Xilinx’s biggest customers.
Micron, in its latest earnings, said that it received no decision from the US Commerce Department on the Huawei ban. This means things will not improve for Xilinx on the Huawei front, too. However, Xilinx could benefit from improved demand in the data center and 5G infrastructure. Wall Street analysts remain slightly bearish. Also, they expect the company to report revenues of $824.8 million.
Many traders bet on the earnings figures, which grow a stock’s trading volume around its financial release. We expect this week to see some mixed results. Texas Instruments stock may rise on earnings estimates that it beat. However, Xilinx stock may be unchanged or fall.