MarketWatch First Take: Texas Instruments tanks the chip sector and investors’ hopes for a rebound

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The recent run-up in semiconductor stocks hit a speed bump Tuesday afternoon that could turn into much more.

Texas Instruments Inc. TXN, -1.80%  gave a forecast that was much worse than expected in a Tuesday earnings report, with a new revenue estimate range that fell as much as a half-billion dollars lower than Wall Street’s consensus revenue estimate. That was not welcome news for investors, who have sent chip stocks higher in recent months on hopes that a downturn for the semiconductor industry would hit its nadir in third-quarter results and start turning around in the final three months of the year.

The Philadelphia Semiconductor Index SOX, -0.77%   is up nearly 40% this year, continuing a roller-coaster ride as the semiconductor downturn has persisted. The index has especially surged in the past quarter, adding 6.3% as the S&P 500 index SPX, -0.36%   has gained just 1% and the Dow Jones Industrial Average DJIA, -0.15%   has declined 1.2%.

Shares of TI tumbled nearly 10% in after-hours trading Tuesday, and other semi stocks fell as well, as TI executives blamed broad-based weakness among its customers, plus ongoing trade issues. Intel Corp. INTC, -0.23%  and Advanced Micro Devices Inc. AMD, -1.62%  lost 1.6%, Nvidia Corp. NVDA, -0.20%  fell 2.1% and Xilinx Inc. XLNX, +0.97%  sank 1.7%.

When analysts tried to get more specific information from the company about what exactly was causing the shortfall, TI executives responded in rather vague generalities while refusing to call a bottom to the downturn.

“It is due to macro events, and specifically, the trade tensions, and if you think about when there’s 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 a long supply chain,” TI Chief Financial Officer Rafael Lizardi told analysts. “This thing we’ve been in, it [has been] for four quarters and it’s going to be longer than that.”

Some analysts wondered if TI’s issues were due to its new strategy to sell more chips directly to customers and to cut ties with some of its biggest distributors. But TI executives said that was not a factor and that its changes in distribution and having a more direct relationship with its customer “yields more rewards than it does risk, and it gives us greater access to those customers.”

“Customers are just far more cautious than they were, certainly a year ago, but even 90 days ago, and many of them talk about the caution. They mention the trade tensions that we know have been happening, and have been kind of accumulating over the last three or four quarters,” Lizardi said when asked for more details behind the new guidance.

If TI is an example, investors may have to let go of the notion of a near-term recovery, as this column has warned since a second-half rebound was originally suggested. Combined with disappointments from IBM Corp. IBM, +1.04%  and Netflix Inc. NFLX, -4.09%  last week, tech’s earnings season has gotten off to a rocky start, and all eyes now move to Xilinx and Intel as they prepare to give more info on the chip sector later this week.

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