It's no secret that over the last three years, top semiconductor manufacturer Texas Instruments (TXN -0.29%) has underperformed both the S&P 500 and the semiconductor industry (as measured by the iShares Semiconductor ETF) by a wide margin.
Data by YCharts.
So far in 2024, Texas Instruments (TI) stock has been heating back up, rallying nearly 20% since April. The latest earnings report provided limited reasons for optimism, but it turns out a notable activist investor purchasing shares and getting vocal might be the best reason investors may want to take heed.
TI's "capex holiday" turns into a spending spree
The activist investor in question here is Elliott Management, which, at the end of May, disclosed a $2.5 billion stake in TI stock. Elliott Management was clear in its proposal: Cut back on capital expenditures (or capex, spending on property and equipment) and return the business to free cash flow (FCF)-per-share growth.
Elliott's proposal essentially just suggests TI should return to its long-vaunted key financial metric -- (FCF)-per-share, which accounts for capex spending -- sooner rather than later. TI has kept capex in check for years (what I call the TI "capex holiday"), which helped keep FCF steadily on the rise in grand fashion for nearly two decades. But something changed as of late.
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Originally outlined back in 2022, in response to pandemic-era chip shortages and expectations for massive long-term increases in power chip demand from automakers and other industrial companies, TI management laid out a plan to dramatically increase capex to an average of $5 billion per year through 2026. The capex holiday is over. This spending is in support of multiple new chip fab (manufacturing facility) projects.
Capex is all fine and well, but the timing wasn't ideal. This elevated spending began at exactly the time TI's revenue and profitability took a hit -- due to the chip shortage flipping to chip oversupply during the bear market of 2022 and 2023.
In Q1 2024, revenue and generally accepted accounting principles (GAAP) operating profit were down 16% and 34%, respectively, from the year prior. This builds on the declines TI suffered in 2023 as well. The Q2 2024 outlook implies only modest quarter-over-quarter improvement, but TI has a lot of ground to cover to achieve peak sales and profit amid its heavy capex spending plans.
Data by YCharts.
Is the stock a buy if TI management listens?
At a $2.5 billion equity stake to TI's total market cap of nearly $180 billion, Elliott hardly owns enough stock to single-handedly dictate this semiconductor company's future plans. Nevertheless, I believe TI management should listen. Much like Elliott, I've called out TI's aggressive fab construction plans as a key risk for TI shareholders.
And apparently investors agree, as the stock has done poorly even as the semiconductor industry has charged ahead in the last year. This reflects, at the very least, some skepticism about TI's aggressive fab construction.
Granted, the chipmaker does need to expand and continue to update existing facilities, as there is ample competition in the power and analog chip market that could one day undermine TI's dominance. However, based on management's outlook, the current pace of capex spending and facility construction would leave TI with a huge amount of unused manufacturing capacity in five years' time.
Perhaps this is a difference in time horizon, with Elliott asking for FCF-per-share growth right now, versus TI building excess manufacturing capacity so it can return to more robust FCF-per-share growth later this decade. However, given how disastrous building too much too quickly can be for a manufacturing company, I say TI should split the difference between Elliott's proposal and its own current trajectory.
To be clear, I'm not buying TI stock right now. However, if management listens and eases up on its forecasted capital expenditures, this could become a much better-performing stock than it has been over the last few years. Keep a close eye on this one.
