Activist investor pressures Texas Instruments to stop spending cash on fabs

Notorious tech investment firm Elliott Management has penned a letter to Texas Instruments urging the company to change course on its aggressive plan to boost manufacturing capacity.

The $65 billion hedge fund, which has amassed a $2.5 billion stake in Texas Instruments, says in its letter [PDF] that the chipmaker is investing way too much into its 2022 plan to almost triple production capacity by 2030. Elliott Management's core reasoning is that TI is projected to overshoot demand by a significant margin in the coming years: 54 percent in 2026 and 50 percent in 2030, when the plan will be complete.

The expansion has already cost Texas Instruments billions. Its capital expenditure for most of the past 14 years has been a billion dollars or less, representing a single digit percentage of revenue. In 2021 and 2022, capex rose to 13 and 14 percent of revenue respectively, but that's nothing compared to the 29 percent seen in 2023. In 2024, capex is expected to rise further to 32 percent of revenue.

"Elevated capex is not inherently negative and, in some cases, it presents a great opportunity when customer demand is high and return-on-investment is compelling," the letter reads. "But here, TI is building to capacity levels that are 50 percent above consensus revenue expectations in 2026 and 2030 (and without providing guidance on how this capacity will ultimately contribute to free cash flow per share)."

Elliott isn't alone in its concerns, which are shared by analysts at both Wells Fargo and TD Cowen. They say Texas Instruments would need to achieve a compound annual growth rate (CAGR) of 19 to 20 percent to not have any excess capacity. The letter points out that achieving such a high growth rate now is unlikely as consumer demand has fallen off since 2022, which was the last year of the chip crunch started by the COVID-19 pandemic.

"When TI first announced its capital investment plan in 2022, consensus expectations for 2026 revenue were $26 billion," the hedge fund says. "Today, expectations have declined by 24 percent to $20 billion. Yet despite lower expected demand from customers, TI's targeted revenue capacity has remained unchanged at $30 billion."

Get out your hankies, because Elliott says the consequences for shareholders have been notable. Free cash flow per share, something that Texas Instruments has historically prided itself on, has decreased by more than 75 percent since 2022. By contrast, free cash flow per share grew at an annual rate of 17 percent from 2006 to 2019, Elliot complains.

Consequently, Texas Instruments has underperformed its competitors in the past few years, the missive continues. Texas Instruments' stock price has risen about 89 percent compared to five years ago, while both Microchip and Analog Devices have both gained about 140 percent in value. This isn't entirely due to the fab expansion plan, Elliott claims, but is still an important factor.

Build the fabs, but don't equip them until necessary

While Elliott criticizes the current fab expansion plan, the letter doesn't say Texas Instruments should scrap it entirely, since that would probably result in lots of wasted dollars. Instead, the hedge fund recommends a middle path that would see the analog and embedded processing chipmaker continue its plan to build the fabs, but not immediately equip them with all the tools necessary to bring production fully online.

Termed the "dynamic capacity-management approach," this strategy isn't actually new, not even to Texas Instruments, as Elliott points out. The semiconductor corp's Richardson, Texas fab started construction in 2004 but didn't become operational until 2009, since its capacity wasn't necessary. The facility was only equipped with chipmaking tools in 2009, which were apparently bought for "pennies on the dollar."

The letter also shares a slide from a 2012 investor presentation where Texas Instruments illustrated that it deliberately underequipped its fabs in order to not go far above actual demand. In that year, its excess capacity was around 30 percent, but could have been closer to 50 percent or so if the chip firm had fully kitted out its facilities.

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The hedge fund guesses that if Texas Instruments were to pursue this idea, it could bring its excess capacity in 2026 down to 39 percent if current revenue projections are correct, and boost free cash flow per share more in line with the historical trend.

Elliott's recommendation is far less radical than what it has pushed through with other tech companies as of late. Last year, it penned a letter to cell tower firm Crown Castle that called for a brand new slate of executives. It also successfully lobbied for Western Digital to cut itself in two different companies, which is set to happen later this year.

A spokesperson at Texas Instruments sent The Reg a statement: "We received the letter yesterday and are reviewing it. As always, our focus is on continuing to make decisions that are in the best interest of TI and all of our shareholders." ®