Introduction

According to Bernstein, the outlook for Texas Instruments is not looking promising. Analyst Stacy Rasgon has downgraded shares of the company from market perform to underperform. This article discusses the reasons behind the downgrade and the concerns raised by Rasgon.

Long-Term Strategy

Rasgon’s main concern for the downgrade is Texas Instruments’ long-term strategy, which involves increasing in-house chip production. While this strategy aims to ensure long-term production and margin sustainability, it is also capital intensive. The analyst highlights the company’s structural increase in inventory as another factor contributing to the downgrade.

Market Expectations

Rasgon points out that the current market models do not adequately consider the consequences of Texas Instruments’ plans. He believes that gross margin expectations are too high and predicts a potential decline in gross margins, possibly reaching the 60% level or worse. The analyst also mentions the near-term tactical risk for the stock due to overestimated fourth-quarter revenue and 2024 numbers.

Investment Horizon

Rasgon acknowledges Texas Instruments’ long-term investment horizon, which is longer than most other companies. However, he suggests that this longer horizon may lead to structural underperformance as the company’s strategy unfolds. It is important to note that Rasgon respects Texas Instruments for being transparent about their capex and inventory plans.

Stock Performance

Shares of Texas Instruments fell by 2% during premarket trading following the downgrade. In 2023, the stock has only seen a 3.3% increase, significantly underperforming the S & P 500’s rise of 17.1%. Rasgon also highlights that, based on his estimates, the stock is currently trading at more than 30 times above its 2025 free cash flow estimates, making it expensive.

Conclusion

While Rasgon does not deem Texas Instruments’ strategy as “wrong” or “bad,” he believes it may lead to structural underperformance. The analyst suggests that the stock’s expensive valuation and potential short-term risks further contribute to the downgrade. Investors should carefully assess the long-term implications of Texas Instruments’ strategy before making investment decisions.

Source: HaberTusba (Michael Bloom contributed to this report)