SAN JOSE, Calif. -- Investors are increasingly rewarding semiconductor companies for short-term returns to shareholders, rather than long term R&D investments, one Wall Street analyst said. If that's true, it marks a significant and unfortunate industry milestone.
"In the past not investing in R&D was a sign of no growth and poor ability to compete in the future," said the analyst who asked to remain anonymous so he could speak freely. The new view is the chip sector is not growing significantly, so "why keep throwing good money after bad?" he said.
Texas Instruments is the poster child of the new way of thinking. It bought back nearly $3 billion of its stock recently, pumping its share price up 40%. In a May 13 call with financial analysts TI's CFO laid out a new model that's already well in place of freeing up cash so it can pay greater dividends to shareholders. In the last five years, TI returned to shareholders 113% of its previous target, a cumulative $14 billion in profits.
A decade ago that cash might have bought a new fab or two, but not today. "Why invest in R&D if growth prospects are about 5% a year, ROI has fallen, and people need to adjust their investments," said the analyst.
"Every company is wrestling with this," he said. "The costs are rising on Moore's Law, and the potential returns are more difficult to generate -- you need to be an economist as much as a technologist these days," he added.
Intel stands on the opposite end of the spectrum from TI, still holding lots of big expensive fabs and still investing in them. Its short-term returns to shareholders have not been so great, but the tide may turn if Intel can make those investments pay off some day.
In the end there's a mismatch in the short-term time horizon of investors and the long-term horizon of chip companies. "Chip companies have to invest for way into the future," the analyst said.
I know advances in silicon technology are coming more slowly at greater cost. I can see how since the financial collapse of 2008, the sun seems to have set on the days of double-digit growth in semiconductors.
When you blend in this shift in investors rewarding short-term dividends over R&D investments, the new dynamics are making me reach for the Maalox bottle.
— Rick Merritt, Silicon Valley Bureau Chief, EE Times