Texas Instruments Stock Is Expensive. The Case to Sell the Chip Maker.

Texas Instruments caught a Sell rating from a Wall Street analyst on Wednesday as the semiconductor company embarks on a "massive" long-term investment cycle. On Wednesday morning, Bernstein analyst Stacy Rasgon downgraded Texas Instruments stock (ticker: TXN) to Underperform from Market Perform. He maintained his $145 price target.

Shares of Texas Instruments, which designs and manufactures semiconductors, were down 2% to $167.28 in premarket trading.

Rasgon finds the stock expensive. A look at its price-to-earnings ratio shows Texas Instruments trades at 22.6 times its expected earnings over the coming 12 months. That's higher than the five-year average of 22.4 listed for the stock on FactSet.

The stock looks even more expensive if one considers Rasgon's estimates for gross margin, which show the metric heading toward 60% or lower from 2025 to 2030. Consensus for gross margin is between 63% to 65% from 2025 to 2028, according to FactSet. The company delivered 68.8% in 2022. (Gross margin is calculated by dividing gross profit by the revenue).

"Consensus appears to be structurally mismodeling the likely trajectory of gross margins for the company as elevated capex [capital expenditure] rolls through the model," Rasgon wrote.

Texas Instruments has forecast capital expenditure to average around $5 billion a year from 2023 to 2026. The company is moving to add capacity to produce products at a significantly lower cost to service demand. CEO Haviv Ilan called the move a "new phase of evolution" for the company at a conference with Bernstein in June.

"We won't knock them for it [capital expenditure strategy], but do believe it is likely to lead to structural underperformance as it rolls out," Rasgon said in Wednesday's note.