In an effort to address chip shortages and meet future demand, Texas Instruments (TI) announced on Tuesday that it anticipates a substantial increase in its free cash flow (FCF) by 2026. The analog chipmaker has been under pressure from activist investor Elliott Investment Management to improve its capital spending and adjust production capacity to adapt to changing market dynamics.

TI's recent investment in expanding manufacturing capacity was aimed at mitigating chip shortages experienced during the pandemic, but it also presented challenges to its cash flow. However, the company now expects its FCF per share to be between $8 and $12 in 2026, surpassing the previous estimate of $6.91 provided by Visible Alpha. This projection signifies a significant rebound from its FCF, which had fallen by 77% to $1.47 in 2023, according to LSEG data.

Elliott Investment Management, which disclosed a $2.5 billion stake in TI earlier this year, pushed for tighter spending and adjustments to production capacity to optimize FCF. The activist investor believes these measures could potentially lead to FCF of $9 per share by 2026. Following TI's announcement, Elliott Investment Management expressed its approval, stating that the company's actions were a "positive step" towards increasing value for its shareholders.

Under the leadership of CEO Haviv Ilan, TI has focused on expanding its in-house production capabilities and 300mm production capacity to improve cost-effectiveness. Ilan attributes the projected FCF growth to the planned expansion of its 300mm production capacity, which is expected to be completed by 2026. This milestone will enable the company to phase out further investments.

Looking ahead, Texas Instruments forecasts revenue between $20 billion to $26 billion for 2026. As part of its revised strategy, the company plans to reduce capital expenditure for the year, estimating it to be between $2 billion and $5 billion. This marks a significant shift from its initial plans to spend around $5 billion annually through 2026.

"This is a welcome announcement and not a total surprise, as there were hints that TI's grand capital expenditure plans would tighten," commented Michael Schulman, Chief Investment Officer at Running Point Capital.

Additionally, TI stands to receive up to $1.6 billion through the U.S. CHIPS and Science Act for building new facilities, further strengthening its position in meeting future market demands.

With its renewed focus on managing capital spending and aligning production capacity with changing market dynamics, Texas Instruments aims to further enhance its financial performance, bolster shareholder value, and ensure a steady supply of chips in the face of growing industry demands.