Shares of Texas Instruments (NASDAQ: TXN), a producer of analog and embedded chips, rallied as much as 4.1% on Wednesday before retreating to a mere 3% gain as of 12:18 p.m. ET. Still, that was a much more substantial gain than the general semiconductor sector, with the iShares Semiconductor ETF (NASDAQ: SOXX) only up about 0.7% at that time.
Texas Instruments gave a midyear update on its long-term spending plans on Tuesday, which is something the company usually does only once a year. But the analog chip industry is currently in one of the worst downturns in its history, and the company acknowledged that, by lowering the bottom end of the range for its long-term spending plan first introduced in 2022.
An elevated investment cycle at the worst possible time
After the supply chain shortages of 2021, Texas Instruments embarked on a long-term spending plan that would elevate its capital expenditures over four years to around $5 billion per year, from 2023 through 2026. The idea was to invest in U.S.-based capacity for crucial semiconductors that go into a wide range of industrial and automotive applications, all while lowering its cost per chip.
The company has made a strategic decision to concentrate on industrial and automotive applications, which accounted for 75% of its revenue in 2023, as opposed to just 40% in 2014.
The problem is that Texas Instruments made these long-term plans at a time when industrial and auto chip demand was booming in 2022 amid shortages. But now, those end markets are in one of their worst downturns ever.
In fact, the company even said that unit demand right now is currently worse than in 2019, which was the last downturn. It's rare for a cyclical trough to go lower than the previous one in the chip world.
Image source: Texas Instruments.
The combination of weak demand and high spending has taken the company's free cash flow down to near zero currently, in contrast to the billions in cash flow its investors are used to seeing every quarter.
Management finally seemed to acknowledge its markets might not be as robust as thought. In the rare midyear long-term planning update, which it usually only makes once per year, management left its 2024 and 2025 spending plans unchanged, but lowered its outlook for 2026 spending to a range of $2 billion to $5 billion, down from $5 billion, depending on its revenue generation at that time.
Apparently, that acknowledgement of market conditions and paring back spending is encouraging investors today.
Texas Instruments is strangely at all-time highs
The company has recently lagged the semiconductor market due to its lack of exposure to AI trends, but the stock is near its all-time highs.
That might seem counterintuitive, given the severe downturn we are in right now. But chip stocks tend to curiously move in anticipation of cycles, rather than during them.
Still, the company also updated its outlook for free cash flow per share in various recovery scenarios for 2026, ranging from $8 to $12. Texas Instruments' long-term track record of cash flow and dividend growth certainly makes it a good long-term holding, but with shares at $208 today, or about 20 times the middle of a 2026 recovery scenario, shares look like more of a hold than a buy today.
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Billy Duberstein and/or his clients have positions in Texas Instruments. The Motley Fool has positions in and recommends Texas Instruments and iShares Trust-iShares Semiconductor ETF. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
