Sensor manufacturer Sensata Technology (NYSE:ST) reported Q2 FY2023 results beating Wall Street analysts' expectations, with revenue up 4.07% year on year to $1.06 billion. However, next quarter's revenue guidance of $1 billion was less impressive, coming in 2.49% below analysts' estimates. Sensata Technologies made a GAAP profit of $49.1 million, improving from its profit of $34.8 million in the same quarter last year.

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"Sensata delivered robust results in the second quarter with record revenues for the quarter. The sustained performance we are generating demonstrates that Sensata remains on track to achieve its long-term growth goals, including scaling its Electrification business to $2 billion in revenue by 2026,” said Jeff Cote, CEO and President of Sensata.

Originally a temperature sensor control maker and part of Texas Instruments for 60 years, before eventually being spun out, Sensata Technology Holdings (NYSE: ST) is a leading supplier of analog sensors used in industrial and transportation applications, best known for its dominant position in the tire pressure monitoring systems in cars.

Demand for analog chips is generally linked to the overall level of economic growth, as analog chips serve as the building blocks of most electronic goods and equipment. Unlike digital chip designers, analog chip makers tend to produce the majority of their own chips, as analog chip production does not require expensive leading edge nodes. Less dependent on major secular growth drivers, analog product cycles are much longer, often 5-7 years.

Sales Growth

Sensata Technologies's revenue growth over the last three years has been unremarkable, averaging 12.2% annually. As you can see below, this was a weaker quarter for the company, with revenue growing from $1.02 billion in the same quarter last year to $1.06 billion. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

While Sensata Technologies beat analysts' revenue estimates, this was a sluggish quarter for the company as its revenue only grew 4.07% year on year. This marks 11 straight quarters of growth, showing that the current upcycle has had a good run, as a typical upcycle usually lasts 8-10 quarters.

Sensata Technologies's revenue is projected to contract next quarter, with the company guiding to a 1.79% year-on-year decline. On the other hand, analysts seem to disagree and forecast 2.04% revenue growth over the next 12 months.

In volatile times like these, we look for robust businesses with strong pricing power. Overlooked by most investors, this company is one of the highest-quality software companies in the world, and its software products have been the gold standard in critical industries for decades. The result is an impressive business that's up an incredible 18,000%+ since its IPO. You can find it on our platform for free.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

This quarter, Sensata Technologies's DIO came in at 82, which is one day below its five-year average. At the moment, these numbers show no indication of an unusual inventory buildup.

Key Takeaways from Sensata Technologies's Q2 Results

With a market capitalization of $7.11 billion, Sensata Technologies is among smaller companies, but its $857.3 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.

We were impressed by Sensata Technologies's strong improvement in inventory levels. We were also excited that its revenue growth outperformed Wall Street's expectations. On the other hand, its underwhelming revenue guidance for next quarter was disappointing and its gross margin shrunk. Overall, this was a mixed quarter for Sensata Technologies. The stock is flat after reporting and currently trades at $46.48 per share.

So should you invest in Sensata Technologies right now? When making that decision, it's important to consider its valuation, business qualities, and what's happened in the latest quarter. We cover this and more in our full company report, and it's free.

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The author has no position in any of the stocks mentioned in this report.