Who Wins From the Worldwide Chip Shortage?

As manufacturers around the world continue to struggle with chip shortages, giant chipmakers like Nvidia have attracted most of the attention, but smaller manufacturers focusing on specific niches could be the real winners of the chip shortage.

 

One such company is NXP Semiconductor (NASDAQ:NXPI).

NXP manufactures semiconductor chips with a focus on networking, RF and communications.

 

The company’s chips are used in a variety of industries, but its main business line is the production of automotive chips. As with most major chip manufacturers, NXP also develops and sells software compatible with its products.

 

In Q2, NXP’s revenues rose 28 percent year-over-year to reach a total of $3.3 billion. Nearly half of this revenue was derived from automotive chip sales, which grew at a blistering pace of 36 percent YoY.

 

This strong revenue growth may continue into 2023, as the company was unable to fulfill its total volume of orders in the most recent quarter.

 

While this revenue growth was impressive, the company’s earnings were even more positive. NXP reported earnings of $4.40 per share, handily beating the $3.05 consensus estimate.

 

Earnings also more than doubled YoY, as the company reported just $2.05 per share in Q2 2021.

With both revenue and earnings rising steadily, NXP seems to be on a positive track. In the next five years, analysts expect the company to maintain a fairly steady growth rate of 14 percent per year. New growth drivers in the automotive industry could also add as much as $3 billion in additional revenue by 2024.

 

Another encouraging trend for NXP can be found in its margins. Net margins have recovered to pre-2020 levels by rising steadily throughout 2021 and 2022.

 

Gross margin has improved even more and currently sits near an all-time high. These improvements in profitability have been vital to NXP’s earnings growth and will likely support higher share prices as revenues continue to increase.

 

Over the next 12 months, analysts expect NXP to rise to a median target price of $200, a 31.8 percent increase over its current price. The stock enjoys a consensus buy rating from 13 out of 28 analysts. Of the remaining 15, 3 rate the stock as outperform, 11 recommend holding and only 1 lists the stock as a sell.

 

NXP also appears to be a decent choice from a value perspective. With a price-to-earnings ratio of just 10.78 and cash flow of $14.10 per share, NXP seems to be fairly undervalued at today’s prices.

 

Debt, however, may present a problem for the company. The current debt-to-equity ratio stands at 1.54, a factor that raises some concerns as interest rates rapidly increase.

 

One of the best indicators that NXP is undervalued is its very low price-to-earnings-growth ratio, which currently stands at just 0.49. This places it well into undervalued territory and makes it a more attractive buy than many other stocks in the semiconductor industry.

 

In addition to its large potential upside, NXP also pays a generous dividend that could bolster overall returns. Each share of the stock currently pays $3.38 annually, a yield of 2.23 percent. While NXP has only raised its dividend for two consecutive years, the dividend appears reasonably safe due to a sustainable payout ratio.

 

The biggest short-term risk for NXP is likely a slowdown of its auto chip business. While automakers are ordering more chips than ever before this year to catch up with supply backlogs, a cooling economy could put the brakes on new car sales.

 

Sales are currently down about 19 percent in comparison to 2019, showing that consumers may be more wary of purchasing. Higher interest rates are likely adding to the fear of a slowing economy, as the cost of financing a new vehicle has risen considerably in 2022.

 

Another slightly troubling aspect of NXP for investors is the extremely low level of insider ownership at the company. At the moment, company insiders own just 0.11 percent of NXP. This fact is, however, somewhat offset by high institutional ownership. Nearly 90 percent of the company is owned by institutional investors, showing a high degree of confidence from the professional investment world.

 

Overall, there’s a very strong argument behind NXP as a business. As a major and established chip manufacturer for the automotive market, NXP is in a prime position to capitalize on rising demand for semiconductors. The company has demonstrated its ability to raise revenue and earnings and appears to be on track for solid, sustainable growth.

 

It’s also important to remember that the number and complexity of chips needed to manufacture vehicles will likely only continue to rise.

 

Cars, trucks and SUVs become more technologically advanced with each passing year, requiring more chips to support additional functionality. As long as this trend continues, NXP will likely continue to grow.

 

Finally, NXP appears to be attractively priced. With a decent dividend and a low price-to-earnings ratio, NXP’s investment thesis doesn’t hinge on massive, unsustainable growth levels.

 

Considering NXP’s strong business fundamentals, there’s a good argument to be made that the stock is undervalued. As such, investors who are willing to hold may be able to see returns that outperform the market.

 

While debt and the macroeconomic climate are somewhat concerning, neither appears to be enough to throw NXP off of its growth track at the moment.

 

Management remains confident in ongoing growth from the auto industry, and automakers continue to place non-refundable orders for new chips. If a slowdown does occur, its effects will likely be temporary.

 

Ultimately, NXP appears to be an attractive buy to take advantage of the ongoing chip shortage. While chipmakers are gradually increasing production worldwide, demand will likely continue to outpace supply for some time to come. NXP is a solid company that can profit from these conditions and potentially reward investors with steady, stable returns.

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