Investidea: NXP Semiconductors, because chips will not be enough

Инвестидея: NXP Semiconductors, потому что чипов маловато будет

Today we have a speculative idea: take shares of the Dutch semiconductor company NXP Semiconductors (NASDAQ: NXPI), to capitalize on the growth of her business.

Growth potential and validity: 15% behind 14 months excluding dividends; 10% per annum, taking into account dividends during 15 years.

Why stocks can go up: because chips are a profitable topic.

How do we act: we take shares now by 197,74 $.

When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.

No guarantees

Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.

And what is there with the author's forecasts

Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.

So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.

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What the company makes money on

NXP is a manufacturer of integrated devices. This means, that she herself is engaged in the following works:

  1. Designs the chip.
  2. Makes silicon wafers and cuts them into chips.
  3. Testing, collects and packages these chips.
  4. Makes working components and devices out of chips, which is then sold to the customer.

We have already published a detailed analysis of the company's business, so we won't repeat ourselves here.. The numbers below have been updated to reflect the most recent annual report for 2021. In the text we will indicate, when we use the report for 2020: the company has not yet published a full-fledged report for 2021 with a detailed analysis of the business.

The main market for the company is the automotive industry - almost 50% proceeds. The second most important market - industry and the Internet of things - gives more 20% proceeds. The third most important market is communications infrastructure, which gives a little less 16% proceeds. The rest falls on the segment of mobile phones.

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The main market for the company is China: it accounts for over 50% proceeds. Moreover, "China" the company defines, as they like it in Beijing, considering Taiwan. So the real share of purely China may be slightly lower..

Инвестидея: NXP Semiconductors, потому что чипов маловато будет

Инвестидея: NXP Semiconductors, потому что чипов маловато будет

Arguments in favor of the company

Fell down. Shares have dropped significantly since December.: from 238 to 197,74 $. This gives us the opportunity to capitalize on the rebound.

It was good - and it will be even better! In all major areas for the company, we can expect an increase in demand for its products.. The modern automotive industry consumes chips as if it were not in itself - and this is facilitated by a shift towards electric cars.

This is very good for NXP. In general, car sales are falling, now they are below the average annual figures of 2010-2019, and growing EV demand balances risks for NXP, arising from interruptions in the production of machines in the world.

Extremely characteristic, that sales of the NXP automotive segment in 2021 increased by 30%, although all major automakers were forced to reduce production in general - and even in China, the capacity utilization of automotive enterprises is below the end of 2019 and the end of 2020.

As for industry and other "Internet of things" with communications, then NXP is favored by the trend towards automation of everything and the development of high-tech communications - only the Luddite revolution can reverse this process.

Инвестидея: NXP Semiconductors, потому что чипов маловато будет

Price. P / S companies are slightly smaller 5, a P / It's about 29,42. Its capitalization is 53.1 billion. Certainly, it's not the cheapest company in the world, but given all of the above, it could be significantly more expensive. Think, NXP will be appreciated by large institutional investors, who decide to take advantage of the fall of these shares.

Also here it can help, that the company has most of its production facilities located outside of China - in particular, in USA, Singapore, Malaysia and the Netherlands. This could give NXP stock a "political bonus" and lead to an influx of investors., wishing to support chip production outside China.

Something about Europe. EU wants to support European semiconductor companies, and the NXP Dutch registration will allow her to receive some benefits from this in the form of grants or facilitated business conditions.

Accounting. The company pays 3,38 $ dividend per share per year, what gives 1,69% per annum. It's not that crazy money, but still, taking into account the positive situation for the company's business, I think, that fans of payouts can crowd into her shares, expecting dividend growth.

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Maybe, this is what investors will demand from NXP, spoiled by the recent rise in dividend payouts from other companies. Yet NXP, despite all the success, stocks have been marking time for the last year and are now trading not at all at historical highs. It would be in the spirit of activist investors to demand higher payouts.

Инвестидея: NXP Semiconductors, потому что чипов маловато будет

What can get in the way

Will not buy - most likely. As we remember from stories with Arm and Siltronic, regulators in the Old World don't take kindly to the idea of ​​buying European semiconductor companies by someone not from Europe. This virtually eliminates the possibility, that NXP will be bought by someone on the other side of the Atlantic - and by anyone.

Unfortunately, American shoppers have the deepest pockets, and NXP in absolute numbers is not cheap. However, I'll be glad to be wrong. In theory, it is possible to buy a company by a consortium of private European investors in order to later bring the company to the stock exchange in parts - several IPOs of different divisions at once. But this is a very difficult option..

Concentration. According to the 2020 report, 17% NXP's revenue comes from Avnet. Changes in relationship with such a large buyer could negatively impact NXP's financials.

Love and other troubles. Rising cost of raw materials, components, logistics and workforce, contributing to the deterioration of the forecasts of many enterprises, could hit NXP too. So far, NXP, seems to be, successfully passes its costs on to customers, but the possibilities of this kind are still sky-limited. Sooner or later NXP will face, that its customers will begin to reduce the volume of orders, if the rise in prices for its products is completely uncontrolled, – and then NXP margins could suffer.

Инвестидея: NXP Semiconductors, потому что чипов маловато будет

Forcing prosperity. The European Commission wants to get powers, which will enable it to demand that European semiconductor companies produce enough of the right chips. This may lead to, that NXP will be forced to produce less profitable goods. However, this threat is still more theoretical..

Accounting. The company spends on dividends 51% from her profit, while she is weighed down by a heavy load of debts: 14,094 billion, out of which, however, only 2.452 billion needs to be repaid during the year. There is enough money at the disposal of the company to close urgent debts: 2,83 billion in accounts and 923 million debts of counterparties.

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But, given the high need of semiconductor production for investments in the renewal of fixed assets, i would be afraid, that NXP will cut dividends, what will cause the stock to fall. Or at least a large debt burden will severely limit the potential for dividend increases..

Chinese Messenger. China is the main market for the company, and that could be a problem, if the US decides to seriously crush the Chinese high-tech sector. This kind of news will hit the NXP quotes hard.. And if tangible sanctions are actually imposed against Chinese high-tech enterprises, then this will be reflected in NXP reporting.

What's the bottom line?

We take shares now by 197,74 $. And then there are two options:

  1. wait for growth until 230 $. Think, we will reach this level in the next 14 Months;
  2. keep shares next 15 years, as the company grows and, I dare to hope, increase payouts.

Well, look at the news section on the company's website, to quickly sell shares on the St. Petersburg Exchange in the event of a reduction in payments.

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