Evercore ISI: Texas Instruments’ third-quarter results beat expectations, but late-cycle valuation faces pressure

Where did the third-quarter results beat expectations?

Revenue in the third quarter of 2026 was 6.055 billion dollars, up 11% sequentially and 28% year over year, about 2% above market consensus. Sequential growth also exceeded the seasonal median for the same period over the past five years by about 1%, marking a third consecutive quarter of outperformance versus seasonality.
Earnings per share were 2.62 dollars, 0.18 dollars above market consensus. Gross margin reached 64.2%, 2.6 percentage points above consensus; the higher gross margin was the main reason results exceeded Evercore ISI’s expectations.
The midpoint of the company’s fourth-quarter revenue guidance was 6.05 billion dollars, essentially flat with the third quarter but about 5% above market consensus. Over the past ten years, revenue in the same period has declined by an average of 6% sequentially. The midpoint of EPS guidance was 2.62 dollars, 0.31 dollars above consensus.

Industrial revenue grew more than 40% year over year and 10% sequentially, slightly exceeding the previous cycle’s peak in the third quarter of 2022. Management said that excluding aerospace and defense, as well as test and measurement, industrial revenue would still be below its previous peak, leaving room for further recovery.
Automotive revenue grew by about the mid-teens year over year and 10% sequentially, led by China and the United States; growth in hybrid, electric-vehicle and powertrain-related businesses was about twice that of automotive overall.
Data-center revenue grew 95% year over year and 20% sequentially, with Evercore ISI estimating it at 848 million dollars. The firm estimates that about seven-tenths of Texas Instruments’ data-center revenue in 2025 came from power-supply products, making data-center expansion particularly important for demand for the company’s power-supply chips.
The recovery is uneven: personal electronics revenue was flat year over year, while communications equipment revenue grew along with the company overall but remained only slightly above half its previous peak.

Third-quarter gross margin rose by about 2.8 percentage points sequentially, benefiting from improvements in volume, pricing, capacity utilization and the industrial business mix. Management maintained its expectation of an incremental profit conversion rate of 75%–85%, excluding depreciation, and continued discussions on pricing for 2027.
Management maintained its plan for capital expenditure of 2 billion to 3 billion dollars in 2026, below the approximately 4 billion to 5 billion dollars per year in 2023–2025. Lead times for later-stage equipment are lengthening, but existing cleanroom capacity and reserved equipment slots support continued expansion through 2027.
Evercore ISI expects adjusted free cash flow per share to rise from 3.2 dollars in 2025 to around 18 dollars in 2028; this measure adds CHIPS Act incentives back to baseline free cash flow.

The shares rose about 1% in after-hours trading following the earnings release. Evercore ISI believes this is consistent with its late-cycle view: as earnings continue to rise, the P/E multiple could contract, offsetting part of the impact of earnings growth.
The firm calculates that after adjusting for price inflation in recent years, third-quarter revenue was 19% above its long-term trend line, with the gap expected to widen to 26% in the fourth quarter. Texas Instruments’ forward P/E over the next 12 months has fallen from 40 times in June to 29 times.
Evercore ISI maintained its Outperform rating and 330-dollar price target, based on approximately 17.6 dollars of free cash flow per share in 2028, applying a 23-times valuation and discounting it to 2026. The base case depends on revenue continuing to grow above seasonal levels, data-center demand remaining strong, and product mix, pricing and lower-cost capacity supporting gross margins.