Texas Instruments Stock Is Up 25% This Year, But Looks Like The Chips Are Down Now
Texas Instruments (NASDAQ:TXN) stock has fared reasonably well this year, rising by about 25% since early January. In comparison, industry peer Qualcomm (NASDAQ:QCOM) stock has gained about 21% over the same period. While the broader semiconductor industry has seen a recovery from a cyclical downturn in recent quarters led by the surge in demand for artificial intelligence chips and a recovery in the personal computer market, Texas Instruments has been witnessing some headwinds as major customers have scaled back on purchases.
The company’s product lineup, including analog semiconductors and embedded systems, is more susceptible to macroeconomic factors than other semiconductor sectors. In the automotive market, customers are reducing inventory built up after pandemic-related supply chain issues. The industrial segment, which includes analog products like amplifiers, power management devices, and specialized processors, is also witnessing some weakness. The communications equipment sector also scaled back purchases due to a slowdown in 5G network deployment, especially in the U.S. This, combined with higher production costs from reduced factory usage, caused Texas Instruments’ gross margin to contract by 600 basis points to 58%. Despite these challenges, the company posted stronger-than-expected Q2 2024 results, with both revenue and earnings per share surpassing estimates, though they were down 16% and 35% year-over-year, respectively.
However, there are a couple of trends driving the optimism for the stock. Texas Instruments appears to be scaling back its capital expenditures after aggressively expanding its manufacturing capacity, investing $5.1 billion last year and planning around $5 billion in spending over 2024 and 2025. The company has now reduced its longer-term capital spending forecast for 2026 from $5 billion to a range of $2-5 billion. This reduction is seen as a positive by investors, who had been concerned about high spending despite declining revenues. Sales are expected to drop by 10% this year, following a nearly 13% decline in 2023. The company also noted that it anticipates a significant increase in free cash flow, estimating $8 to $12 per share by 2026, which is well above consensus estimates and up from approximately $6.50 per share in 2022. This shift comes after activist investor Elliott took a $2.5 billion stake in the company, pushing for improved cash flow management.
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Looking over a slightly longer period, TXN stock has shown strong gains of 40% from levels of $150 in early January 2021 to around $210 now, vs. an increase of about 50% for the S&P 500 over this roughly 3-year period. However, the increase in TXN stock has been far from consistent. Returns for the stock were 18% in 2021, -10% in 2022, and 6% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that TXN underperformed the S&P in 2021 and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including AAPL, NVDA, and MSFT, and even for the mega-cap stars GOOG, TSLA, and AMZN.
In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could TXN face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?
Semiconductor content is expected to grow steadily in the coming years in the industrial sector, as automation of productions gathers pace and labor costs continue to rise. The automotive sector is also expected to see strong growth in semiconductor content, driven by connected and self-driving vehicles. The Industrial and automotive sectors together accounted for about 75% of TI revenue in 2023 and the two end markets have expanded at an annual rate of 10% since 2013. This trend could continue going forward as well. The company also invested considerably to expand its 300mm wafer fabrication capacity in the U.S. This helps reduce geopolitical risks, while also improving efficiency and long-term competitiveness. Texas Instruments is also looking to boost its market share in the analog semiconductor space, where it has lost ground to the likes of Analog Devices, NXP, and Infineon. We value Texas Instruments at $198 per share, which is in line with the current market price of $202. See our analysis of Texas Instruments Valuation: Expensive or Cheap for a closer look at what’s driving our price estimate for Texas Instruments.
| Returns | Aug 2024 MTD [1] |
2024 YTD [1] |
2017-24 Total [2] |
| TXN Return | 3% | 25% | 253% |
| S&P 500 Return | 2% | 18% | 152% |
| Trefis Reinforced Value Portfolio | 5% | 13% | 736% |
[1] Returns as of 8/25/2024
[2] Cumulative total returns since the end of 2016
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