Bernstein analyst Stacy Rasgon downgraded Texas Instruments Inc (NASDAQ:TXN) from Market Perform to Underperform, maintaining estimates and $145 target price.

The company has structurally raised its capex outlook significantly as it builds out capacity to support revenue growth over the next 10-15 years, enough to keep ~$30 billion in revenue by 2026 and ~$45 billion by 2030. This capacity will come to fruition via gross capex investments that will average ~$5 billion yearly from 2023-2026 and be in the range of 10-15% of revenue beyond then, with depreciation reaching ~$2.5 billion by 2025. Significant amounts of new capacity will be built in Richardson, Texas (RFAB2), Lehi, Utah (LFAB), and Sherman, Texas (SM1-4: four greenfield facilities), with the company aiming to have over 80% of capacity on 300mm in 2030, and ~90% of their overall capacity internal in 2030. The buildouts are well underway, capacity is coming online, and are independent of near-term market noise.

Street models still do not appear to weigh the consequences of TXN's plans as they structurally raise spending to build out capacity to support revenue growth over the next 10-15 years, and gross margin expectations appear far too high to the analyst.

Tactically, the Street also appears to be mis-modeling Q4 revenues, with estimates well above seasonal and likely too high, which results in over-exuberance for 2024 numbers.

Rasgon's numbers appear to be low on the Street in the future as lower gross margins and revenues take their toll. And the already expensive stock is even more costly than it looks, given the sharp divergence between earnings and free cash flow. 

Rasgon called out the longer investment horizon and found it likely to lead to structural underperformance as it rolled out.

Rasgon reiterated Q3 revenue of $4.55 billion, which trails the consensus of $4.56 billion. EPS of $1.80 lags behind the consensus of $1.81.

Price Action: TXN shares traded lower by 0.51% at $169.82 on the last check Wednesday.