Over the course of the past year, I've bullied top U.S. semiconductor manufacturer stock Texas Instruments (TXN 0.10%). That wasn't totally TI's fault, but rather what I saw as the market overlooking a wave of needed capex (spending on property and equipment) over the next few years, and the elevated risk that comes with an aggressive investment cycle.
Here we are, headed now toward the end of 2023, and TI stock has been hit hard in recent months as many investors have realized what's going on. Shares are now the lowest they've been since 2020, moving in the opposite direction of most semiconductor stocks. For comparison, the iShares Semiconductor ETF, which includes Texas Instruments in its portfolio, is touting a 44% total return (including dividends reinvested) over the last 12 month stretch.
After an ugly run and poor outlook for the next quarter, is it finally time to start buying Texas Instruments stock again?
Missed expectations and a not-so-great outlook
Before delving into the long-term outlook, take a look at TI's Q3 2023. Revenue of $4.53 billion was just under the midpoint of management's guidance provided three months ago, and down 14% from Q3 2022. Earnings per share (EPS) were $1.85, closer to the high end of the guidance range but down 25% year-over-year.
Things aren't going to get better in the fourth quarter. Many of TI's semiconductor peers have been indicating a bottoming in chip demand, in particular for PC and smartphone components after consumer spending on electronics peaked over the summer of 2022. But TI is anticipating a sequential decline as its customers (with the exception of automotive) are still working through excess inventory of chips.
Q4 revenue is expected to be in a range of $3.93 billion to $4.27 billion, and EPS between $1.35 and $1.57. At the midpoint, that implies a year-over-year revenue and EPS drop of 12% and 31%, respectively.
Don't count on this being a "cheap" stock
Profits, though they're in decline, don't tell the whole story here. After over a decade of benefit from a "capex holiday," TI is in the midst of building multiple new fabs (a manufacturing facility that makes chips) in the U.S. They are as follows:
- "RFAB2" in Richardson, Texas, which is being built next to an existing fab.
- SM1 and SM2 fabs in Sherman, Texas that should be production-ready by 2025 or 2026 and could expand to a total of four fabs (SM3 and SM4) over the next few years beyond that.
- One fab in Lehi, Utah, LFAB, which was originally purchased from Micron Technology (NASDAQ: MU), with a second connected facility (the two will operate as one large fab once expansion is complete) currently under construction.
Collectively, these three sites will meet TI's manufacturing needs over the next decade-plus and will cost over $40 billion (including the potential SM3 and SM4 fabs in Sherman). Early in 2023, management outlined its capex outflow to construct these sites, saying it would average $5 billion a year through 2026 before starting to taper off.
That's a massive increase in spending from the previous decade, and it's already having a big impact on TI's free cash flow generation. Funding from the U.S. CHIPS Act will kick in a bit of benefit, but TI will be primarily responsible for this aggressive expansion.
As a result, Texas Instruments stock currently trades for 80 times trailing 12-month free cash flow. With the downturn in its sales not abating and capex only just entering a prolonged period of elevated spend on construction, don't expect TI to be a "cheap" stock anytime soon.
TI only cares about the long-term
As ugly as the picture looks right now, the beauty of a company like TI is its focus on the very long term health of its business. It's spending heavily on state-of-the-art fabs now so that it can continue to grow profitably through the end of the 2020s and beyond.
But I wouldn't underestimate the impact of those projected cash outflows through 2026. More turbulent times could lay ahead for this stock as the market continues to digest the impact of TI's spending and the competitive landscape from other chip fabs addressing top growth markets in industrial and automotive applications.
For now, TI management's long-vaunted focus on free cash flow-per-share growth is out the window, and it remains to be seen when the company will return to its long-term upward trend.
I see two ways of looking at this situation. The first approach, stay clear of TI stock until it starts to gain positive traction again, and spending begins to abate. Or second, there's no telling how investors will react to this unfolding story over the next three years, so might as well start slowly accumulating TI stock now via a dollar-cost average plan in preparation for an eventual rebound.
For now, I'm focusing on chip fab equipment providers that will sop up plenty of TI's capex over the next three years, and holding off on a Texas Instruments stock purchase.