Texas Instruments (TXN 1.27%) has been a phenomenal chip stock over the decades. The company's disciplined expansion, as well as its focus on "mature" chip manufacturing that enabled it to keep costs to a minimum, have led to sustained free-cash-flow-per-share growth -- TI's preferred metric for profitability and shareholder returns for nearly two decades.
But something has clearly changed as free cash flow per share has plummeted since peaking in 2021. Is TI really a safe "buy-and-hold" investment right now?
An epic capex race to keep market share
In the wake of the pandemic, new secular growth trends have been established for semiconductor manufacturing. Renewable power (power management chips, solar components, EVs in the auto industry) and industrial automation (factory automation, network-connected medical equipment, and retail and warehouse automation) have all turned into top investment priorities across a range of industries.
TI has historically focused on mature semiconductor design and manufacturing (think older chip tech, not the leading-edge stuff used in AI) to address these markets, and it's among the biggest names around in terms of revenue. However, TI has begun to fall behind the rapid advance of nearly all of its major competitors -- both on the upswing in 2021 and early 2022 and now on the downswing during the current chip sales slump.
Data by YCharts.
TI still holds sway over the mature chips market, but it's missing the boat in other areas addressing next-gen power management (like silicon carbide, where STMicroelectronics (NYSE: STM), Onsemi (NASDAQ: ON), and Wolfspeed (NYSE: WOLF) are the emerging stars) as well as advanced driver-assist systems (ADAS) in cars (STMicro, NXP Semiconductors (NASDAQ: NXPI)). As a result, TI has become a bit stagnant in the last few years.
It seems that after a decade of enjoying something of a capital expenditure (capex, spending on property and equipment) holiday, TI suddenly finds itself in need of investing heavily to try and capture some of the expanding market share from automotive and industrial applications. The $50 billion U.S. CHIPS Act is here to help, but it can't do all the heavy lifting. TI management has been saying it will average about $5 billion in capex in each of the next four years to expand and improve its manufacturing capabilities to stave off competition in the states and abroad.
Texas Instruments is spending heavily -- so what?
Let's go back to that point on Texas Instruments' free cash flow per share, its preferred metric for measuring long-term progress on profitability. With capex soaring, there is going to be an inverse effect on free cash flow, and it's already starting to bite. Through the last 12-month stretch, TI's capex is up 49% compared to the previous 12-month period to $4.19 billion. Meanwhile, free cash flow is down 46% over the last 12 months to $5.89 billion.
What's astounding to me is just how little TI shelled out in equipment expenses over the last decade compared to what it's spending now. And I'd also point out that the $4.19 billion just dropped isn't even up to the $5 billion-a-year average management has been warning shareholders about over the next four years. Things could start looking particularly ugly for free cash flow per share in the coming years, and I'm not sure the average shareholder has quite caught on to what's happening yet.
Data by YCharts.
Is Texas Instruments toast?
As I argued three months ago, I don't think this development means TI is dead, nor does it make it an "unsafe" stock. This company manages for the long term, as CFO Rafael Lizardi explained to an analyst on the earnings call:
But big picture, a step back to what we told you during capital management, and the investments that we're making are long-term in nature, as you alluded to in your question, and we are going to enable revenue growth for the company for the next 10 to 15 years. OK? So that's how we're thinking about it. And that's why we're making these investments on capex, in particular, about $5 billion per year for the next four years.
TI has clearly missed some of the top trends in energy, automotive, and industrial applications as its peers narrow the market share gap, but TI is fighting back to recapture growth over the long term. It's in good financial standing to do so. However, bear in mind that the next four years of heavy spending are going to create some deep potholes the market may not react all that positively to. Strap in for a volatile stock ride.
And additionally, while TI is thinking 10 to 15 years down the road, if you invested in this company for the dividend growth (like for retirement), you might want to consider if four years -- let alone a decade -- still fits the bill for what you're looking for in a stock. Because meanwhile, a lot of other chip companies (like those mentioned above) are growing their revenue, free cash flow, and cash returns to shareholders.
The short story is, while I believe Texas Instruments will still be a great stock for the long haul, it may not be the surefire "safe" bet some have grown accustomed to thinking it is during the extended free-cash-flow-per-share run of the 2000s and 2010s.
