As Texas Instruments builds out during downturn, analysts await details on capital spending
By Wallace Witkowski
Analog chip maker to reveal more about capital-management plan on Feb. 2
Semiconductor analysts by and large are going to have to wait another week for more details on Texas Instruments Inc.'s decision to stay the course with a long-term capacity buildout as the chip sector continues to search for a true bottom.
Late Tuesday, execs played it cool, assuring investors that Texas Instruments (TXN) would reveal the rest of its hand Feb. 2 when it comes to its strategy of building out its long-term fab capacity. Meanwhile, even this company -- arguably one of the safest bets on the PHLX Semiconductor Index over the past 12 months with its large portfolio of analog chips that proved an essential manufacturing commodity over the course of the pandemic -- feels the pinch of falling demand.
That feeling of wait and see extended to Wall Street, as analysts opined about the strategy that's known so far.
Cowen analyst Joshua Buchalter, who has a market-perform rating, calculated that with the added $350 million from the U.S. CHIPS Act, Texas Instruments now has about $400 million in tax credits, so he'll be expecting "more clarity" on the funding and mechanics of how it will be used.
Buchalter also said Texas Instruments' willingness to build inventory when most chip makers are trying to deplete theirs "serves as a buffer to end market weakness," but he added that digestion of that inventory is "unlikely to be contained to a quarter" and that gross margins and free cash flow are already beginning to feel the squeeze.
"We believe investors need visibility into when revenue can re-accelerate," Buchalter said, along with visibility into "the mechanics and magnitude ofCHIPS Act benefits to feel comfortable with the near-medium [free cash flow] profile, and thus relative potential upside to the stock."
Bernstein analyst Stacy Rasgon said the capex meeting will likely be "eventful," as it is becoming "increasingly plausible" that Texas Instruments will use a "good portion" of the savings from the credits to boost capital spending even higher, leaving the prospect of gross margins of 60% "likely a few years out."
"Note that we aren't necessarily knocking their strategy, as Texas Instruments will be one of the few companies actively building out at some of the deep trailing nodes which may remain tight as we go forward, and in the future (5 years? 10 years?), doubling down now could easily leave them in an advantaged position," Rasgon said.
That said, Rasgon feels it's difficult to argue for more upside on the stock at this point and held on to his $145 price target and market-perform rating.
Evercore ISI analyst C.J. Muse, who has an in-line rating and a price target of $190, said that with a March-quarter outlook below expectations, worse-than-expected gross margins and the lack of a tangible bottom to the market, he puts a floor of $160 to $165 on the stock, with "weakness mostly priced in."
"The correction is clearly here, with the key question being the magnitude and duration -- with management indicating [three to four quarters of year-over-year] declines as likely," Muse said.
Of the 32 analysts surveyed by FactSet who cover the stock, 10 have buy ratings, 19 have hold ratings and three have sell ratings, along with an average price target of $183.73, up from $178.87 from two weeks ago.
Over the past 12 months, shares of Texas Instruments (TXN) have advanced less than 1%, while the PHLX Semiconductor Index has declined 13%, the S&P 500 has declined 8% and the tech-heavy Nasdaq is off 16%.
Unlike chip makers such as Nvidia Corp. (NVDA) and Advanced Micro Devices Inc. (AMD), Texas Instruments operates its own fabs, as do Intel Corp. (INTC) and Micron Technology Inc. (MU).
In 2022, industrial sales made up 40% of Texas Instruments' revenue, while automobile-chip sales made up about 25%, personal electronics 20%, communications equipment 7%, and enterprise systems 6%. An "Other" category made up of "primarily calculators" accounted for 2%, according to the company. Of all those categories, only auto-chip sales saw growth.