Why Texas Instruments stock is up more than the chip sector today

Actions of Texas Instruments (TXN 3.29%)a maker of analog and embedded chips, rose as much as 4.1 percent on Wednesday before retreating to a gain of just 3 percent as of 12:18 a.m. ET. However, this was a much more substantial gain than the overall semiconductor sector, with iShares Semiconductor ETF (SOXX 1.38%) only about 0.7% at that time.

Texas Instruments provided a midyear update on its long-term spending plans on Tuesday, something the company typically 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 lower end of the range for its long-term spending plan first introduced in 2022.

A high investment cycle at the worst possible time

After the 2021 supply chain shortfall, Texas Instruments embarked on a long-term spending plan that would raise its capital spending over four years to about $5 billion a year from 2023 to 2026. The idea was to invest in US capacity for crucial semiconductors that go into a wide range of industrial and automotive applications, all while driving down the cost per chip.

The company made a strategic decision to focus on industrial and automotive applications, which accounted for 75% of its revenue in 2023, up from just 40% in 2014.

The problem is that Texas Instruments made these long-term plans at a time when demand for industrial and automotive chips was booming in 2022 amid shortages. But now, those end markets are in one of their worst declines ever.

In fact, the company even said that demand for units right now is weaker than in 2019, which was the last drop. It’s rare for a cyclical low to go lower than the previous one in the chip world.

Image source: Texas Instruments.

The combination of weak demand and high spending has driven the company’s free cash flow to near zero today, in contrast to the billions in cash flow its investors are used to seeing each quarter.

Ultimately, management appeared to acknowledge that its markets may not be as robust as it had been led to believe. In its rare mid-year long-term planning update, which it usually does only once a year, management left its spending plans for 2024 and 2025 unchanged but lowered its spending outlook for 2026 to a range of $2 billion to $5 billion, down from $5 billion. , depending on the revenue generation at that time.

Apparently, that recognition of market conditions and reduced spending is encouraging investors today.

Texas Instruments is strangely at an all-time high

The company has recently outperformed the semiconductor market due to a lack of exposure to AI trends, but the stock is near its all-time highs.

This might seem counterintuitive given the deep recession we’re in right now. But chip stocks tend to move curiously in anticipation of cycles rather than during them.

However, the company also upgraded its outlook for free cash flow per share under 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 hold, but with shares at $208 today, or about 20 times the middle of a recovery scenario in 2026, the stock looks more like a hold. than a purchase today.