NXP Semiconductors -- Crushing The Web Market

AAA

Do you have to understand the intricacies of a company and its products in order to entrust your money to their stocks?  It's easy to understand the process behind, say, Wendy's: the company buys a lot of beef and a lot of potatoes and sells them in turn to the customer.  Tech firms represent a much more dubious investment for those who prefer to manage their money with a hands-on approach.  Do you need to know what a semiconductor does in order to put semiconductor stocks in your portfolio?  For those who backed NXP Semiconductors through the past month without such knowledge, it turns out ignorance is very profitable bliss.  NXP stock has had double-digit growth through July based on the strongest earnings report in the company's history.  Nestled within that report lie tidbits suggesting that more good times await the company, and its investors, on the horizon.

Netherlands Notoriety

Competing on a crowded market can ratchet up the pressure and create diamonds out of the smallest of entities.  Each day, NXP has to compete against some of the biggest tech firms on the planet, including Intel, Samsung, Qualcomm, and Texas Instruments in the race to develop chips for the next generation of computers.  Do they shrink under the pressure?  Far from it.  NXP's stock price (NXPI on the NASDAQ, trading for $97.93 a share) has doubled since the start of 2014 as the plucky Dutch firm has won over clients and competitors alike, most notably merging with Freescale Semiconductors to become an industry leader and the second-largest European semiconductor chip manufacturer behind only STMicroelectronics.  NXP has climbed to the top thanks to focusing equally on microprocessors as well as microcontrollers -- the former used for processing information, the latter used for memory storage -- rather than putting all its time and money behind one or the other, as Intel does.  This flexibility has given NXP a huge boost as the computer market swings away from hardware and on towards the Internet of Things, a direction that NXP appears poised to dominate.

A Wired World

We think of the Internet as a connection that runs from one computer to the other.  While that's true in the strictest sense of the word, it's far too limiting a description in the 21st century.  Using nothing more than a smart phone, a web user with the proper connection to the Internet of Things can do everything from drive a car to turn on their air conditioning to feed their dog.  We live in a world featuring more and more web-connected devices each day, some minor and some colossal, all of which require secure connection chips.  As the name suggests, these chips provide protection against intrusion from third-party sources ranging from ruthless hackers to mild-mannered data miners.  The ability to protect a web connection makes computer companies turn to semiconductor manufacturers like NXP to create new solutions to what is fundamentally a very old problem.  In the second quarter of 2015, NXP's secure-connection chip sales grew by no less than forty percent compared to the second quarter of 2014.  That's just the tip of the iceberg for a company that's downright steeped in wine and roses.  By any statistic on the stock market, NXP has tremendous growth potential: they enjoy a 98% utilization rate, meaning that almost none of their products sit on the shelves and take up inventory space.  They've lowered their operating expenses by nearly nine percent in the past year at the same time that their sales have shot up by twelve percent.  Their net margins grew from 20% to 23% in just a single quarter.  NXP has manage to nab some of the bigger spenders in the rush to capitalize on the Internet of Things, automobile manufacturers, with eight percent growth from automotive clients.  By any metric you choose to look at, they not just have money to throw around but ample room to grow.

Breaking Down Value

Looking at the $1.37 earnings per share of each individual NXP stock may not appear, on the surface, to be that much value.  This figure represents just a precursor to the stock's growth, however.  The company has set its sights on growth of $1.50 for the third quarter, which would come from $1.6 billion in sales, tipping total yearly revenue to $6.5 billion overall.  They'll take in just shy of 70% of Freescale Semiconductor's total appraisal value when the two companies merge, adding just shy of two billion dollars in total to their operating income.  Look no further than the haste of shareholders of both companies to give the deal a checkered flag: a full 99% of total shareholders for both companies approved the merger, a fantastic vote of confidence for growth.  Such a voting record proves especially promising due to the fact that the merger announcement took place just three months ago, leaving both companies to scramble to plan out their strategies and eliminate redundancies. 

Conductors and Resistors

  • While NXP has only seen growth of about 33% in revenue over the past five years, their cash flow has grown by nearly 900% in that same span of time.  This is tremendous news for investors, since the company either pays a strong dividend or re-invests into the company to prop up their asking price.
  • NXP possesses excellent future opportunities in tandem with a stock trading on six-month lows, making it a very rare combination of both growth and value.  No matter what type of portfolio you intend to maintain, NXP can provide excellent support for investment holdings in need of fresh blood.
  • NXP checks every box that you'd want for an investment: excellent market control, strong customer base, and no monetary problems.  Buy and hold their stock if you have time and patience on your side; NXP likely can't grow fast enough to buy and sell quickly (<1 month) and get good value out of the investment.  Consider a target-date fund that's at least one year out.

Related Articles

The GE Deal: Smoke and Mirrors Comcast's Demise: Greatly Exaggerated The Aerospace Industry is Delivering Science Fiction Has Priceline's Growth Tapped Out? Sierra Wireless: The Ultimate Value Buy
Your browser is out-of-date!

Update your browser to view this website correctly. Update my browser now

×