Texas Instruments Q226: Slowly but surely

Executive Summary

Q2 provides further evidence that TI’s recovery is broadening and that improving factory utilisation can deliver significant operating leverage. This supports our FY2026E EPS estimate of USD 8.48 and FY2028E EPS of USD 11.17. Nevertheless, much of the recovery has reflected in the valuation.

We remain constructive with a BUY call over the longer term, with an end-2028 fair value of USD 346. However, further upside depends increasingly on earnings and cash-flow conversion rather than a simple cyclical rerating.

At the current valuation, further upside depends on three unresolved variables: (1) unit-led Q3 growth, gross-margin conversion and inventory normalisation, (2) FY2027 capital-expenditure discipline, (3) Silicon Labs closing and migration milestones and finally post-acquisition cash conversion and deleveraging. The operating recovery is increasingly visible, but execution must now earn the premium.

What has happened since our last update

Since our previous update in April, Texas Instruments has continued to validate our cyclical-recovery thesis.

The share price increased from USD 269 to approximately USD284 (+5%), although this masks considerable volatility. TI reached a record USD 334 in June before correcting by approximately 15% as valuation concerns moderated investor optimism.

Figure 1: Texas Instruments 1y performance

Read more: Texas Instruments FY26: 300mm strategy

Q226 earnings summary

Table 1: Texas Instruments Q226 earnings summary

Metric	Q2’26 Actual	Q2’25 Actual	Y/Y Change	Q1’26 Actual	Q/Q Change
Revenue	USD 5.463B	USD 4.448B	23.00%	USD 4.825B	13.20%
GAAP gross margin	61.40%	57.90%	+3.5 ppt	58.0%	+3.4 ppt
GAAP EPS	USD 2.14	USD 1.41	52.00%	USD 1.68	27.40%
GAAP operating profit	USD 2.310B	USD 1.563B	48.00%	USD 1.808B	27.80%
GAAP operating margin	42.30%	35.10%	+7.1 ppt	37.5%	+4.8 ppt
Net income	USD 1.980B	USD 1.295B	53.00%	USD 1.545B	28.20%
Operating cash flow	USD 2.703B	USD 1.860B	45.30%	USD 1.520B	77.80%
TI-defined quarterly FCF	USD 2.738B	USD 0.555B	393.30%	USD 1.399B	95.70%

Source: TI, iFAST Compilaton, Data as of 5 Aug 2026.

Analog remained the principal earnings engine, with revenue increasing 26% to USD 4.37 bil and operating profit rising 50% to USD 1.99 bil. Embedded Processing revenue increased 16% to USD 788 mil, while operating profit almost doubled to USD 168 mil. The stronger profit growth relative to revenue reflects improved manufacturing absorption, particularly as utilisation at TI’s newer facilities increased.

Cash generation also improved. Trailing-12-month cash flow from operations reached USD 8.67 bil, up 35%, while TI-defined free cash flow increased to USD 6.53 bil. However, TI’s definition adds USD 1.18 bil of CHIPS Act proceeds. On a conventional basis, cash flow from operations less USD 3.31 bil of capital expenditure was approximately USD 5.36 bil. Both measures improved, but the latter remains the cleaner recurring cash-conversion benchmark.

Inventory declined to USD 4.61 bil from USD 4.81 bil at the end of 2025, while inventory days fell to 196 from 222. This is encouraging, although inventory remains elevated in absolute terms and requires continued sell-through to prevent the current recovery from becoming overly dependent on customer restocking.

Q326 guidance

Table 2: Texas Instruments Q326 guidance

Fiscal/Quarter	Measure	Guidance
FY26	Capex	USD 2-3 bil
Q326	Revenue	USD 5.65b - 6.15B
Q326	EPS GAAP	$2.23-$2.57
Q326	Tax Rate	13%

Source: TI, iFAST Compilaton, Data as of 5 Aug 2026.

TI guided Q3 revenue to between USD 5.65 bil and USD 6.15 bil, with diluted EPS of USD 2.23–USD 2.57. The revenue midpoint of USd 5.90 bil implies approximately 8% sequential growth, while the EPS midpoint is USD2.40. The outlook therefore points to another quarter of above-seasonal expansion, supported primarily by unit growth.

The quality of the Q3 result will matter more than whether revenue merely reaches the midpoint. A result near USD5.90 bil, accompanied by gross margin at or above 61%, predominantly unit-led growth and a further reduction in inventory days, would provide stronger evidence that the recovery is durable.

Investment Thesis

A broader analogue recovery supports the earnings cycle

Q2 provides evidence that the recovery is broadening beyond data-centre demand, with industrial and automotive more consequential for factory utilisation and earnings conversion. Broader demand across these end markets provides a more credible path towards sustained gross-margin expansion.

Table 3: Segment revenue growth

Segment	Q2 Revenue	Y/Y Change	Operating Profit	Operating Margin	Notes
Analog	USD 4.365B	26%	USD 1.992B	45.60%	Primary earnings engine; higher factory utilization and 300mm cost absorption supported margin recovery
Embedded Processing	USD 0.788B	16%	USD 0.168B	21.30%	Operating profit nearly doubled, with improved LFAB loading providing additional leverage
Other	USD 0.310B	-2%	USD 0.150B	48.40%	Smaller contribution; operating profit includes acquisition-related charges
Total	USD 5.463B	23%	USD 2.310B	42.30%	Broad-based operating recovery, led by Analog

Source: TI, iFAST Compilaton, Data as of 5 Aug 2026.

The wider semiconductor backdrop according to SIA and WSTS remains supportive, with global semiconductor sales reaching USD 120.6 bil in May 2026, up 9.2% m/m and 104.1% y/y. However, the headline industry growth rate remains heavily influenced by advanced logic and memory. We therefore do not mechanically apply this growth to TI’s mature-node analogue exposure, which the more relevant signal is that industrial and automotive demand is beginning to participate in the recovery.

The 300mm strategy is translating into operating leverage

TI’s technology advantage is not based on leading-edge transistor density. Instead, it combines a broad analogue catalogue, proprietary process technology, internal manufacturing and long product lives. Once loaded, 300mm production offers better chip economics than conventional 200mm manufacturing and provides TI with greater control over supply, lead times and process migration.

TI has added substantial 300mm capacity, which should support operating leverage if utilisation continue to improve. The Sherman facility is particularly important because its first 300mm fab is already in production, with the site designed to support up to four connected fabs over time.

Table 4: Texas Instruments Key 300mm Fabrication Locations

Location	Notes
Richardson, Texas (RFAB)	Home to RFAB1 (the world’s first 300mm analog fab, opened in 2009) and RFAB2 (started production in September 2022). Together, they output over 100 million analog chips per day.
Sherman, Texas (SM)	Features the SM1 fab which began production in December 2025 with future plans for up to four connected fabs (SM1 through SM4) as part of a multi-billion-dollar footprint expansion.
Lehi, Utah (LFAB)	Comprises the existing LFAB1 and the expanding LFAB2 project, which function together as a unified, connected 300mm manufacturing site

Source: TI, iFAST Compilaton, Data as of 5 Aug 2026.

Our model forecasts gross margin recovering from 57.0% in FY2025 to 60.8% in FY2026E and 62.8% by FY2028E. Operating margin is projected to reach 46.3% by FY2028E. These projections remain dependent on higher factory loadings, disciplined capital expenditure and a favourable product mix; they are not a mechanical consequence of revenue growth.

Silicon Labs is strategically coherent but financially demanding

The proposed USD 7.5 bil Silicon Labs acquisition strengthens TI’s embedded wireless-connectivity portfolio and adds approximately 1,200 products. Silicon Labs’ portfolio is also suited to TI’s internally owned 28nm process technology, creating an opportunity to migrate externally manufactured products into TI’s 300mm network.

Management expects more than USD 450m of annual manufacturing and operational synergies within three years of closing, with completion expected during H1 2027. Our model remains more measured, incorporating US$75m of realised synergies in FY2027 and USD 225 mil in FY2028 while retaining higher interest and integration costs. The transaction is strategically sensible, but value creation requires an on-time close, customer retention, disciplined process migration and visible post-acquisition deleveraging.

Read more: Texas Instruments FY26: 300mm strategy

Key Risk

Chinese mature-node competition remains a structural risk, particularly if aggressive pricing spreads beyond domestically focused suppliers. Product mix and elevated depreciation could also delay gross-margin recovery. At the company level, the Silicon Labs transaction introduces execution and balance-sheet risk while TI is still converting a large manufacturing investment into cash flow.

Maintain BUY; TP at $346 with 29% upside potential

Table 5: TI’s valuation

	FY25	FY26e	FY27e	FY28e
EPS	5.45	8.48	9.25	11.17
y/y growth		55.6%	9.1%	20.8%
Implied PE	49.37	31.73	29.09	24.09
Current Price	269.04
Fair PE				31
Target Price				346
Upside Potential				28.7%

Source: Bloomberg Finance L.P, , iFAST Compilaton, Data as of 5 Aug 2026.

We retain a fair P/E of 31x. The premium is supported by TI’s long-lived product portfolio, customer diversity, internally owned 300mm manufacturing and improving cash generation. However, it also assumes that the earnings recovery remains durable and that the Silicon Labs transaction does not interrupt the cash-conversion cycle.

Applying 31x to FY2028E diluted EPS of US$11.17 produces an end-2028 fair value of USD 346, implying about 29% upside potential from today’s price of USD 269.

Table 6: TI’s income statement, actual and forecast

(USD mil, except EPS)	FY24A	FY25A	FY26E	FY27E	FY28E
Total Revenue	15,641	17,682	21,887	23,982	26,309
Analog	12,161	14,006	17,569	18,975	20,493
Embedded core	2,533	2,697	3,250	3,510	3,791
Silicon Labs contribution	—	—	—	450	1,000
Other	947	979	1,068	1,047	1,026
Revenue growth	-10.70%	13.10%	23.80%	9.60%	9.70%
Cost of revenue	-6,547	-7,599	-8,591	-9,137	-9,787
Gross Profit	9,094	10,083	13,297	14,845	16,522
Gross margin	58.10%	57.00%	60.80%	61.90%	62.80%
R&D	-1,959	-2,083	-2,120	-2,278	-2,368
SG&A	-1,794	-1,860	-1,939	-2,038	-2,052
Acquisition/restructuring charges¹	124	-117	-68	-300	-150
Realized synergies	—	—	—	75	225
Operating Income (EBIT)	5,465	6,023	9,170	10,303	12,177
Operating margin	34.90%	34.10%	41.90%	43.00%	46.30%
Other income and expense	496	230	240	160	150
Interest expense	-508	-543	-568	-700	-715
Pre-Tax Income	5,453	5,710	8,842	9,763	11,612
Income tax expense	-654	-709	-1,039	-1,269	-1,393
Net Income	4,799	5,001	7,803	8,494	10,219
Diluted EPS (USD)	5.2	5.45	8.48	9.25	11.17

Source: TI, iFAST Compilaton, Data as of 5 Aug 2026.

¹ FY24 reflects a net restructuring benefit. FY27–28 forecasts assume 8% organic growth in both Analog and Embedded core, incremental Silicon Labs revenue, improving factory utilization and realized acquisition synergies.

Disclaimers:

This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.