Investment Opportunities Spotlight: Texas Instruments and ASML Holding

Investors searching for opportunities within semiconductor companies may want to focus on two potentially undervalued entities this month, namely Texas Instruments (back to back referred as TI) and ASML Holding. Following record-breaking closings for both the S&P 500 and Nasdaq Composite on July 25, the disparity between growth potentials became starkly clear, as myriad of tech giants pulled out sizeable advances from their April stands. Nevertheless, for a change, some tech stocks were caught off the wave. Notably, TI and ASML underwent significant valuation declines post their most recent quarterly earnings updates.

In more detail, post presenting its earnings on July 22, TI’s stock value dipped 13.9% within three days up until July 25. In parallel, following the release of its earnings on July 16, ASML’s stocks recorded a similar downturn, shrinking 13.6% in their value. The financial reports presented by both companies could have broader implications on other entities associated with artificial intelligence (AI).

In their latest financial results, while TI reported decent progression, it hinted at a projected deceleration for the upcoming third quarter, this pessimistic projection had a destabilizing effect on their valuation. ASML, on the other side, its results showed growth but came with a caveat that they are unable to confirm business expansion for the year 2026. This was attributed to the surrounding unpredictability in terms of macroeconomic conditions and geopolitical movements.

Adding a positive note, however, ASML reconfirmed their targets for 2030, anticipating a doubling in revenue relative to 2024 figures and a boost in their gross margins from the early half the 50% mark to somewhere between 56% and 60%. The uncertainties floated by TI and ASML about upcoming deceleration could potentially reshape investor sentiment.

To comprehend the wider influence these firms may have on the larger AI landscape, it’s imperative to understand where they situate within the bigger picture. Take the metaphor of the semiconductor field as a house, in such a scenario, TI becomes the securing nuts and bolts that hold everything together due to its provision of analog and embedded semiconductors.

As an integral part of our electronics world, analog semiconductors manage to convert analog info into electric impulses. Case in point, the audio signal generated by a microphone from a sound wave. Utilized in an array of consumer electronics like speakers, these chips also have use cases across industries: mobile communications, satellite communications, measurement devices, automotive, healthcare, and more.

Also, in the product portfolio of TI are the embedded semiconductors that connect and control electronic devices through hardware and software solutions. These solutions cater to several functions such as processing, wireless connectivity, sensing, motor control, cybersecurity, safety, amongst others. Growth sectors for these specific products include industrial automation, automotive applications, and edge AI.

Elaborating on the latter, edge AI allows the execution of AI solutions directly on a device as opposed to doing it in the cloud and then transmitting information across. An example from TI’s product line could be their offerings meant for smart factory applications; these use AI microprocessors to enhance functionality such as efficiency, security, and facilitate human-machine interactions.

Although TI doesn’t contain critical GPU or CPU components used in data centers, it still provides vital infrastructure elements like power management solutions, converters, controllers, and connectivity. The company has observed negative growth over recent years, attributed to a slowdown post a demand surge seen during 2022 and 2023.

Contrarily, ASML’s specialty lies in fabricating intricate photolithography machines used in advanced semiconductor production, with a virtual monopoly on extreme ultraviolet (EUV) technology, the latest advancement in this segment. Given their crucial role in crafting high-end AI chips on a large scale, their hardware is in high demand.

Unlike TI, which boasts diversity in terms of products and customers, ASML has a focused portfolio and fewer, albeit significant, customers. Their recent quarter witnessed the sale of 76 lithography systems, translating into 5.541 billion euros of business, with each system averaging out at $85.6 million. The newest EUV systems command even higher prices, ranging from $150 million to $400 million.

Spending cycles are dictated by key customer demands and capital expenditure plans. TI’s assertion that recovery may take longer than initially foreseen mirrored with ASML’s indication of possible short-term market uncertainties associated with trade tensions and economic vagaries.

Keep in mind TI and ASML’s roles in building important periphery components, rather than CPUs or GPUs. Both contribute and benefit from the overarching growth narratives around AI and global interconnectivity. Despite the divergent outlooks, both provided a reminder of the semiconductor industry’s cyclical nature and how external factors could affect earnings. Their forecasts shouldn’t directly influence chip designers like Nvidia and Broadcom or suggest a slowing down in AI advancements. In sum, TI and ASML continue to offer viable investment option in semiconductor domain, presenting potential avenues to ride the wave of industry transition, further sweetened by their incrementally growing dividends.