Daily Stock Watch: NXP Semiconductors (NXPI) Reports Upbeat Q2

By Kirsteen Mackay

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NXP Semiconductors (NASDAQ: NXPI) reported upbeat Q2 earnings. The NXPI stock price is down slightly in early trading.

NXP Semiconductors (NASDAQ: NXPI) reported its Q2 earnings yesterday for July 3, 2022. Earnings per share (EPS) of $3.52 beat FactSet consensus estimates of $3.40. Company revenues came within guidance projections at $3.31bn, while FactSet sales consensus was $3.27bn.

What is NXP Semiconductors?

NXP Semiconductors Inc (NASDAQ: NXPI) is an American Dutch semiconductor company. It designs and manufactures semiconductor solutions. Its portfolio includes intellectual property, deep application knowledge, process technology and manufacturing expertise in cryptography-security, high-speed interface, radio frequency (RF), mixed-signal analog-digital, power management, digital signal processing and embedded system design.

NXP’s product solutions are used in various end market applications, including automotive, industrial and Internet of Things (IoT), mobile and communication infrastructure.

The company operates globally and is the world’s second-biggest supplier of chips to the automotive industry. NXP Semiconductors was founded on August 2, 2006, and is headquartered in Eindhoven, the Netherlands.

NXPI Q2 Financial Results

On Monday, 25 July 2022, NXP Semiconductors N.V. reported financial results for the second quarter, which ended July 3, 2022.

Key Earnings Highlights:

  • Revenue: $3.31bn (up 27.6% Y/Y)

  • GAAP gross margin: 56.8%

  • GAAP operating margin: 28.5%

  • Non-GAAP gross margin: 57.8%

  • Non-GAAP operating margin: 36%

  • Cash flow from operations: $819m

  • Cash dividends: $222m (Paid on April 6, 2022)

Kurt Sievers, NXP President and CEO, said:

NXP delivered quarterly revenue of $3.31bn, an increase of 28% Y/Y and above the mid-point of our guidance range. Notwithstanding the clear macro-economic cross currents, NXP continues to perform well.

Customer demand within the Auto and Industrial & IoT end-markets continues to exceed our incrementally improving supply, even as we risk-adjust our long-term orders. New design win commitments are remarkably strong across our focus end-markets, which underpins confidence that our investments are well aligned with the long-term market requirements,

In June, NXP announced its new MCX portfolio of microcontrollers. These are designed to advance innovation in smart homes, smart factories, smart cities and across many emerging industrial and IoT edge applications. The portfolio includes four series of devices built on a common platform and is supported by the widely adopted MCUXpresso suite of development tools and software.

Last month NXP also announced two new processor families to extend the benefits of NXP’s innovative S32 automotive platform. The S32Z and S32E processor families help enable the automotive industry to accelerate the integration of diverse real-time applications for domain and zonal control, safety processing and vehicle electrification that are critical to the next generation of safer and more efficient vehicles

This month NXP announced that it has signed a memorandum of understanding with Hon Hai Technology Group (“Foxconn”) to jointly develop platforms for a new generation of smart connected vehicles. Hon Hai (Foxconn), the world’s largest electronics manufacturer and a leading technology solution provider, will leverage NXP’s portfolio of automotive technologies and its longstanding expertise in safety and security to enable architectural innovation and platforms for electrification, connectivity, and safe automated driving.

How Does NXP Semiconductors Make Money?

NXP Semiconductors makes money from the sales of its semiconductor chips. Around half its revenue comes from the auto industry. It also makes money from Industrial & IoT, Mobile, Communications Infrastructure and Other.

YTD Revenue Breakdown by End Market:

  • Automotive: $3.27bn

  • Industrial & IoT: $1.39bn

  • Mobile: $789m

  • Communications Infrastructure & Other: $994m

In the past, NXPI has made money from its Standard Products segment and Manufacturing Service Agreements but not in recent years.

NXPI Stock Financials

NXPI stock has a price-to-earnings ratio (P/E) of 21.3, compared to the industry average of 1.1. Its price-to-book value (P/BV) is 7, above the industry average of 1.7. NXPI stock offers shareholders a 1.9% dividend yield.

Over the past year, NXPI stock has traded between $140.33 and $239.91.

Year-to-date, the NXP Semiconductors NV (NXPI) stock is down by -24.69%, while the S&P 500 is down -17.3% over the same period.

NXPI Growth Potential

In Q1, NXPI's global sales rose 22% Y/Y to $3.13bn, and revenue increased across all regions.

In its Q2 financial statement, the company cited strong demand in auto, industrial and connected devices markets. This is an encouraging outlook for future growth.

For Q3, NXP Semiconductors gave a positive stance, with forecast revenues coming between $3.35bn and $3.5bn. That is above the average analyst estimate of $3.32bn. The gross margin could be as high as 58.3%, beating analyst projections of 57.6%.

NXPI Stock Risks

Semiconductors have long been considered a cyclical investment, but the growing trend for electrification has increased demand, and some believe the chip industry is in a secular bull market. Nevertheless, it faces headwinds, such as supply chain bottlenecks, which weigh heavily on the stock. 

Like its peers, NXP outsources much of its production to suppliers, including the Taiwan Semiconductor Manufacturing Co. (TSMC). This is a potential weakness in the system as foundries such as TSMC struggle to keep pace with orders.

Semiconductor stocks have come under pressure this year, and NXPI is no exception. NXPI shares are down 24.7% year-to-date as uncertainty makes investors nervous.

One outlying concern for the semiconductor industry is Taiwan's potential geopolitical disruption. China has warned the US against House Speaker Nancy Pelosi’s planned visit to Taiwan, prompting speculation that trouble is brewing. If China were to wage war on Taiwan, it would cause an international disaster and upend the global semiconductor supply.

Success in the end market ultimately depends on the supply chain operating smoothly. For instance, General Motors (NYSE: GM) Q2 net income fell 40% Y/Y due to chip shortages.

Should You Invest in NXP Semiconductors?

The NXP Semiconductors share price is down -27% from its December high, and bullish shareholders see this as an opportunity to buy the dip. As long as chip demand continues and nothing interrupts its progress, NXPI stock stands to benefit.

As the company demonstrated in Q2, it continues to surpass expectations.

Q3 estimates are encouraging, and the global energy transition paints a positive picture for continued growth. 

FactSet analysts have an Overweight rating on the stock with a target share price of $198.68.

Deutsche Bank Research analyst, Ross Seymore, gave NXPI stock a Buy rating with a target share price of $195. Meanwhile, Mark Lipacis at Jefferies reiterated his Buy rating on the stock with a target share price of $231.

As stated above, there are some clear areas of risk to be aware of, but the 1.9% dividend yield is another plus point for NXPI stock. Whether you buy shares in NXP Semiconductors depends on your appetite for risk and investing time horizon.

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Author: Kirsteen Mackay

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

Kirsteen Mackay does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the above article.

Kirsteen Mackay has not been paid to produce this piece by the company or companies mentioned above.

Digitonic Ltd, the owner of ValueTheMarkets.com, does not hold a position or positions in the stock(s) and/or financial instrument(s) mentioned in the above article.

Digitonic Ltd, the owner of ValueTheMarkets.com, has not been paid for the production of this piece by the company or companies mentioned above.

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