Company Name: NXP Semiconductors
Entry Price: $180
Target Price: $240
Projected Yield: 27.60%
Time Line: 3 to 6 months
Position Size: 2%
About NXP Semiconductors
NXP Semiconductors is one of the largest semiconductor and microchip manufacturers; its products are used in automotive, industrial & IoT, mobile, and communication infrastructure, among other industries.
What's the Idea?
Capitalize on a stock that may rise with higher demand for semiconductors in the automotive, manufacturing, and telecom industries, as well as with a lack of supply.
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Why Trade NXP Semiconductors?
Reason 1: Increased Demand for Semiconductors Coming from Car Manufacturers
The green legislation did not prevent the automotive industry from its further development, it rather made it look for some innovative solutions, such as electric cars, of which more and more are being currently sold across the globe. China is a leader here, as the demand is high, and the manufacturers are thus numerous. Some analysts believe almost 20% of all cars will be based on electricity by 2025.
Another innovation includes self-driving cars. Although some automotive giants, such as Tesla, General Motors, Ford, Daimler AG, or Volvo, were skeptical about this idea before, they are currently developing and implementing self-driving modules. All this means that NXP Semiconductors still has a good target market, as most of their products are intended for the automotive industry. In 2019, NXP had an 11.30% share here, being only second to Infineon, Statista says.
NXP covers almost all the needs of its customers in the automotive industry in terms of digital infrastructure products, which namely includes the following:
- Vehicle internal system data collection and analysis
- Communication systems
- Information and entertainment infrastructure
- Electric car battery management devices
- ADAS and highly automated driving solutions.
NXP Semiconductors also partnered with Amazon, which may allow it to speed up data processing; this, in its turn, will help develop the ADAS, or autopilot, the one we have only before seen in sci-fi movies.
IHS Markit, which, among other things, focuses on tracking financial market data, reports a shortage in the semiconductor industry, which negatively affects car producers. Nissan, Toyota, Chrysler, Ford, and Fiat already cut production, while Volkswagen AG is concerned that the supply restrictions may slow its production down in February.
All this happened mostly because the demand had risen drastically, and this may bring good profits to NXP Semiconductors.
Reason 2: Switching to 5G and Expanding IoT Integration
NXP is not backed by the automotive industry alone, though. Switching to 5G and the increasing popularity of the Internet of Things (IoT) also bring many benefits. Both industries are expected to rise to success in the next decade, one even backing the other. In addition, Elon Musk intends to build a satellite network across the entire planet, which is also going to boost 5G.
Although the competition is harsh, the annual growth for the 5G compatible device semiconductor market is seen by Grand View Research as extremely high, too, namely 63.40%, during 2020-2027. This is not only due to the new devices emerging, but also because of the IoT, the market that might be worth $1.386T by 2026, with an annual growth of 10.53%, as Mordor Intelligence reports. NXP is a major IoT market player in the Smart Home and Smart City niches, so it is sure to benefit with both 5G and IoT exploding in popularity.
Reason 3: Confident Financial Performance
NXP's earnings plunged last year, as the company lost 3%, or $8.60B, due to the pandemic. Automotive and mobile sectors were the most affected ones in Q2 2020; however, the numbers started recovering as early as in June. In automotive and communication infrastructure, the earnings declined by 9%, while industrial and IoT and mobile rose by 15% and 5%, respectively.
Average annual operating income decreased to 4.80% vs 7.20% in 2019; nevertheless, in Q4 2020, it already reached 18.30% against 1.40% over the previous period. The annual profit went down from $272M to $80M, and yet, by the end of the year, the net profit amounted to $320M against a $18M loss in Q3 2020. One can easily trace business recovery here.
NXP's debt burden is moderate, being at $7.60B, while the amount of cash is $2.27B. The net income to EBITDA ratio is 1.9x, which is a very decent level. The company has no issues with liquidity, the free cash flow for 2020 being $2.10B, which is 24% of the earnings. This shows NXP's financial performance is good, its operation numbers are competitive, and it has enough cash to further expand its business.
Reason 4: Outlooks and Assessments
NXP's Forward EV/S is currently 6.3x), while its Forward EV/EBITDA is 19.7х, and Forward PE, 28.5x, al of which is above the industry average. The investment banks and corporations also forecast a stock price which is higher than the current one: Morgan Stanley believes it's $190, Credit Suisse Group set it at $215, Loop Capital, at $212, Raymond James, at $220, and Cowen believes it should be $225.
How to Use an Investment Idea?
- Buy NXP Semiconductors stock at $188.
- Allocate no more than 2% of your portfolio amount. To build a balanced portfolio, you can use recommendations by our analysts.
- Sell the stock when the price is at $240 per share.
How to Buy NXP Semiconductors Shares?
If you don't have an investment account yet, open it now: this can be done online, in just 10 minutes. All you need to do is fill out a short form and verify your account.
After opening an account, you can buy shares in either of the following ways:
Freedom24 Online Store: This is the easiest way to do it. Add the number of shares you want to buy to the cart and pay by credit card. Once the transaction is processed, the purchased shares will appear on your investment account.
Freedom24 Web Platform: : In the Web Terminal section, type NXPI.US (NXP Semiconductors ticker in the NASDAQ) in the search box, and select NXP Semiconductors in the results. Open a secure session in the trading window on the right, select the number of shares you want to buy, and click Buy.
Freedom24 iPhone or Android App: Go to the Price screen and tab the search icon in the top right corner. In the search dialog that will show up, type NXPI.US (NXP Semiconductors ticker in the NASDAQ) and select NXP Semiconductors in the search results. You will then see the stock in the market watch; tap it and go to the Order tab in the dialog that shows up. Specify the number of shares you want to buy and click Buy.
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