What to expect from TXN’s first quarter after Elliott Management’s activist stake

In May this year, activist investor Elliott Management took a $2.5 billion stake in Texas Instruments.

Their demand was two pronged: make the capacity expansions more dynamic and increase the free cash flow.

The reason Elliott Management thought the stock could use some better decision making was because TXN’s capital investments were getting slightly out of control.

It was building capacity way beyond what it would utilize in the next 3 years.

Due to a slump in analog semiconductor demand, TXN’s revenue projection for 2027 was at one point just half its total expected capacity.

Elliott Management took a stake in the company and asked the management to slow down with their capital investments. It suggested a more dynamic approach, investing on the go as the demand required.

This would also help the company’s free cash flow, which had taken a hit due to these heavy investment.

TXN’s earnings this week will be the first full quarter of earnings since the activist investor took a stake in the company.

We swill have to wait for the earnings call to see if the management’s plans have changed.

But here’s what the present performance depends on.

TXN continues to face challenges

The demand is likely to stay on the lower side in both the automotive and industrial supply chains.

The struggling EV market means this demand isn’t expected to increase anytime soon.

Moreover, Texas Instruments continues to face challenges in the local market due to an increasingly competitive global semiconductor environment.

This is also where Elliott Management’s stake becomes important.

The company may have lose sight of its competitive edge while expanding. If the company loses that edge and as a result market share, the massive expansion will look even more ridiculous.

What are the analysts saying

Analysts have lowered their expectations across the semiconductor industry, so TXN investors shouldn’t be worried about that.

On a positive note, while analysts have also lowered their price targets for companies like Onsemi, Microchip, and NXP, they have raised their price target for TXN from $190 to $200.

Mizuho analysts believe the recovery in analog semiconductor demand will be uneven.

There was some optimism from the last quarter’s demand but that would be the exception rather than the norm.

Heading into 2025, the automobile sector is expected to face further headwinds, keeping the demand for TXN’s products low.

We believe Auto OEMs for 2025E are targeting 10%+ y/y declines in semis [average selling prices], with we estimate overall analog pricing down ~5-10% y/y

With higher inventories across the sector, a struggling automotive industry, and low global manufacturing PMIs, it would be foolish to expect any significant upside in demand in the short term.

For now, investors would be better off focusing on the dividends and the long-term plans rather than any short term upside based off an earnings surprise.