Texas Instruments hits new intraday high! Hedge fund giant Elliott invests $2.5 billion, demanding improved shareholder returns

On Tuesday, May 28th, the stock price of Texas Instruments, the world's largest analog chip manufacturer, reached a historical high of $206 at the opening, with a peak increase of 3.4%. By midday, the increase narrowed, and the stock price hovered around the psychological barrier of $200.

Texas Instruments saw a jump in its stock price at the opening mainly due to a letter from one of the world's largest activist institutional investors, hedge fund Elliott Investment Management, to the board of directors of the chip giant, demanding operational improvements and increased shareholder returns.

Elliott Management disclosed that it holds up to $2.5 billion in equity investments in Texas Instruments and is requesting the company to adopt a more lenient capital expenditure plan to improve its free cash flow. Specifically, the company's capital expenditure plan implemented in 2022 is weakening shareholder returns.

Texas Instruments is canceling its outsourced chip manufacturing business and instead bringing most of the manufacturing work back in-house. As a result, the company has raised its capital expenditure plan to increase production capacity. For example, it plans to invest $20 billion over four years to support a revenue doubling to $30 billion by 2026 and an aggressive target of reaching $45 billion in revenue by 2030.

However, this has caused its free cash flow to decrease by over 75% since the significant increase in production capacity in 2022, dropping from $6.40 per share in free cash flow in 2022 to $1.48 per share last year, with an expected $1.87 per share in free cash flow this year:

"Its stock price has been negatively impacted, significantly lagging behind competitors over the past two, four, six, and ten years."

Elliott Management stated that the plan set for 2022 will increase Texas Instruments' capital expenditure by up to $5 billion annually from 2023 to 2026, accounting for 23% of revenue, far exceeding the company's capital expenditure of about 5% of revenue over the past decade.

The company's planning may be too rigid and inflexible, leading to production capacity construction far exceeding the expected demand levels, "the company faces a reversal in chip demand cycles, which will result in production levels exceeding Wall Street revenue consensus expectations by 50% in 2026 and 2030."

Elliott Management therefore recommends that Texas Instruments adopt a "dynamic production capacity management strategy" and introduce a target of at least $9 per share in free cash flow by 2026 to address the weakening of shareholder returns, a free cash flow target 40% higher than market expectations.

Some analysts pointed out that Texas Instruments erased most of its earlier gains before midday because Elliott Management's "hostile tone is much less than its historical levels," indicating that the hedge fund seems unlikely to strongly challenge the company's management in the short term.

Furthermore, Elliott Management did not make a firm demand for Texas Instruments to switch to a more dynamic capital expenditure approach. If the company can more effectively explain why it believes increasing production capacity is reasonable, it can do so, as dynamic changes in market demand are also difficult to predict accurately. Texas Instruments has informed shareholders that the increase in capital expenditure is a temporary measure and will focus again on dividend payouts and share buybacks in the future Three weeks ago, when introducing the financial performance of the top ten chip giants in the first quarter globally, Wall Street News mentioned that Texas Instruments performed poorly in all business segments, with a 16% year-on-year decrease in revenue to the lowest level in a single quarter since 2020, and a 35% year-on-year decline in net profit, but both figures exceeded market expectations.

"As the largest manufacturer of analog semiconductors and embedded processors, Texas Instruments has the widest customer base among chip manufacturers, with customers spanning multiple industries from space hardware to consumer electronics, and is seen as a barometer of economic confidence.

The company's President and CEO Haviv Ilan emphasized the recent challenges, pointing out that revenue from all end markets has declined both sequentially and year-on-year, highlighting broader market challenges that may be affected by the economic conditions dragging global semiconductor demand."

However, this demand dilemma is not unique to Texas Instruments but a resistance faced by the entire industry. The latest profit guidance from Texas Instruments indicates that after resolving the issue of component oversupply, its customers have started to resume chip orders. It is expected to achieve sales of $3.95 billion in the second quarter, potentially realizing the first growth after more than a year of year-on-year sales decline and surpassing analyst expectations.

Texas Instruments has risen by 17% year-to-date, while the chip industry benchmark - the Philadelphia Semiconductor Index - has risen by nearly 28% during the same period.

The red line, blue line, and green line represent the performance of NVIDIA, the Philadelphia Semiconductor Index, and Texas Instruments over the past year