We recently published a list of Billionaire Paul Singer Says Stay Away from These 7 AI Bubble Stocks; 3 Tech Stocks He’s Buying. Since Texas Instruments Inc (NASDAQ:TXN) ranks 10th on the list, it deserves a deeper look.
Billionaire Paul Singer’s Elliott Management has reportedly said in a latest letter to investors that mega-cap AI tech stocks are in “bubble land” and Nvidia is “overhyped.” The fund said in its letter that it’s skeptical about the notion that technology companies will keep buying AI chips in high volumes in the future, adding that AI is “overhyped with many applications not ready for prime time”. It also claimed that many AI use cases are “never going to be cost-efficient, are never going to actually work right, will take up too much energy, or will prove to be untrustworthy.” The fund reportedly said in its letter that AI is in effect software that has failed to deliver “value commensurate with the hype”.
The $66 billion Elliott Management founded by billionaire Paul Singer, who is one of the most feared activist investors in the US, said there are “few real uses” of AI other than “summarising notes of meetings, generating reports and helping with computer coding”.
Elliott Management said in its letter that it stayed away from “bubble” stocks included in the Magnificicient Seven group.
Elliott Management last year posted a modest gain of 4.7%. However, it has a record of no down years since the financial crisis in 2008. Since its inception in 1977, the fund has reported just two down years, a feat hard to match in the hedge fund industry.
While Elliott calling mega-cap AI stocks a bubble is a major development, it’s certainly not a surprise. Many investors and market experts have been warning about the hype around major AI stocks.
Here is what Insider Monkey’s founder and Research Director Inan Dogan said about Elliott Management’s latest thoughts on AI stocks:
“I have been saying that NVDA’s market cap assumes that the company will make around $150 billion in profits perpetually which is crazy. Elliott is saying the same thing and it is becoming news! Investors don’t know how to bet on the AI revolution, so the only visible companies that they think will benefit are semiconductor and cloud companies. That’s why they have been piling into NVDA. It doesn’t mean that other tech companies are in a bubble territory. In contrast, if Elliott is right that other megacaps are overspending on NVDA chips right now, this implies that their earnings are understated and they are actually much more profitable and cheaper than Elliott thinks. That’s why NVDA and cloud companies are in different categories. NVDA could be in bubble territory but I am not sure other megacaps in the Magnificient Seven group are in a bubble.”
For this article, we analyzed the top AI stocks in the Mag. 7 group which according to Paul Singer are in a bubble. We also talked about three AI/tech stocks that were in Singer’s portfolio, as of the end of the first quarter of this year. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Paul Singer of Elliott Management
Texas Instruments Inc (NASDAQ:TXN)
Number of Hedge Fund Investors: 49
Unlike Mag. 7 stocks which Elliott is broadly bearish on, the fund’s views on TXN are positive as it recently opened a $2.5 billion stake in the company and sent a letter to the management, pushing it for improvements in free cash flow. The letter said:
While many investors, including Elliott, agree with the Company’s long-term strategic vision, TI’s stock has underperformed for its investors. TI’s shareholder returns have lagged peers consistently over a multi-year period, despite TI’s reputation as one of the best-managed semiconductor companies with strong growth prospects and competitive advantages. In fact, TI’s shareholder returns rank in the bottom forty percent of the semiconductor index over every time period in the last decade. Our diagnosis is simple: Investors are concerned that TI appears to have deviated from its longstanding commitment to drive growth of free cash flow per share.
UBS recently published a list of high-quality stocks that also pay dividends. Texas Instruments Inc (NASDAQ:TXN) made it to the list. The stock has a 2.61% dividend yield as of July 3.
Texas Instruments Inc’s (NASDAQ:TXN) valuation has been a concern for many amid a lack of strong growth catalysts. The stock’s forward P/E is 37.80, much higher than the industry median of 24. The average analyst price target on the stock is $181, which is lower than its July 3 closing price of $198. According to data from Yahoo Finance, Wall Street expects Texas Instruments Inc’s (NASDAQ:TXN) earnings to fall by 6% over the next five years on a per-annum basis.
Texas Instruments Inc (NASDAQ:TXN) makes most of its revenue from Industrial applications, Automotive and Personal Electronics. During the first quarter earnings call the management said the industrial segment was down “upper-single digits. The automotive market was down mid-single digits. Personal electronics was down mid-teens. Next, communications equipment was down about 25%.”
“First, we saw personal electronics was the first market that went into the correction. It really is — was the first to come out in the last few quarters, I’d describe it as behaving more seasonal. If you go to the other end of the spectrum, we have, had industrial, which has been declining sequentially from some time. And over the last few quarters, we’ve been talking about how there’s some asynchronous behavior inside of the 12, 13 sectors that we have there. That continued inside of the quarter. So we have got some of the later-cycle sectors that are continuing to decline and declining at double-digit rates. But there are some that are beginning to — begin to slow in the declines and even a couple that grew sequentially.”
Diamond Hill Select Strategy stated the following regarding Texas Instruments Incorporated (NASDAQ:TXN) in its Q2 2024 investor letter:
“Among our top individual contributors in Q2 were Amazon, Texas Instruments Incorporated (NASDAQ:TXN) and Mr. Cooper Group. Shares of semiconductor manufacturing company Texas Instruments rose in Q2 as demand in several of the company’s end markets show signs of recovering. Given the company’s long-term prospects, competitive positioning and scale advantages, we believe the outlook for the company from here is strong.”
Overall, Texas Instruments Inc (NASDAQ:TXN) ranks 10th on Insider Monkey’s list titled Billionaire Paul Singer Says Stay Away from These 7 AI Bubble Stocks; 3 Tech Stocks He’s Buying. While we acknowledge the potential of Texas Instruments Inc (NASDAQ:TXN), our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than TXN but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.