NXP Semiconductors (NASDAQ:NXPI) is a large European semiconductor business that specializes in RFID, near-field communication, automotive and IoT chips, among other related business lines.
Despite a general boom in the semiconductor business, NXP shares have fallen about 7 percent over the last year due to a moderate cyclical downturn. Has this selloff left NXP undervalued, or could the stock still have further to fall?
NXP’s Streak of Slowing Revenues and Earnings
NXP has seen its revenues decline on a year-over-year basis in each of the last five quarters. Earnings per share have fallen too, though the decline has been significantly more dramatic.
The past three quarters have each seen EPS fall by 20 percent or more compared to the year-ago periods. In total, NXPs trailing 12-month earnings per share have fallen from $10.69 in Q2 of last year to $8.39 as of the end of Q2 this year.
Some light at the end of the tunnel is visible in the form of quarterly revenue of $2.93 billion came in above the mid-point of management’s previous revenue guidance. Although it was still 6 percent lower than the year-ago quarter, this also represented the lowest rate of revenue decline since Q3 of last year. Automotive and IoT revenues also increased relative to Q1, though IoT was still down on a year-over-year basis while automotive revenue remained essentially flat.
In spite of the bumps, on a trailing 12-month basis, net margin sits at 17.7% and a return on equity of 22.3 percent. Share buybacks have persisted too, including a $204 million repurchase in Q2 alone.
Is NXP Set for a New Upward Cycle?
Though NXP has faced a period of declining revenue and earnings, there are still some positive catalysts that could restore growth and lift the stock’s price going forward.
To begin with, NXP has the potential to benefit from strong secular growth trends in both the NFC and RFID markets. Through 2030, the RFID market is expected to keep growing at a CAGR of 15.8 percent, eventually reaching a total value of $47.6 billion. Growth in the NFC space may be slower, but the market is still expected to grow at a rate of 7.1 percent annually through 2030.
Another considerable opportunity for NXP is in the automotive market, where it already enjoys a strong moat as a major supplier of chips. Of particular note are the advanced semiconductors it supplies for EVs, giving the business exposure to the ongoing trends of automotive electrification and autonomous driving development.
With demand for EVs likely to keep rising in the coming years, NXP constitutes a pick-and-shovel play on a fast-growing industry without the high price tags often attached to EV manufacturers.
NXP has also recently made moves to strategically refinance some of its outstanding debts that could help it to take full advantage of the opportunities of the coming years.
Earlier this week, management announced that it would be issuing a series of new notes totaling $1.5 billion that will come due in stages between 2028 and 2035. The proceeds from the sale of these notes will be used to refinance those that are set to come due in 2026.
Cumulatively, these trends could bode very well for NXP Semiconductors. Over the next 3-5 years, analysts are expecting earnings growth of around 11.2% annually. Such a turnaround would allow NXP’s EPS to both make up the ground lost over the last five quarters and significantly exceed the previous highs.
Where Is NXP Stock Trading Now?
Although NXP is down a bit, the stock is still priced at a level that implies decent forward performance and future growth. Shares are currently trading at 26.2 times earnings, somewhat higher than the sector average of 22.7. NXP also trades at 4.6 times sales and 30.4 times cash flow.
Considering the earnings growth that NXP could see in the coming years, though, these metrics could still leave the stock at a fairly attractive valuation. With an average analyst price target of $258.71, NXP is expected to produce a 12-month return of over 17 percent from its current price of $230.52.
While this estimate handily exceeds the 5-year rate of expected earnings growth, it also reflects the strong market trends that could support NXP’s expansion over a long period of time. As such, NXP could be modestly undervalued even with somewhat high P/E and P/S ratios.
NXP’s Dividend and Dividend Growth
Another point of note about NXP is the fact that the stock pays a respectable dividend. Right now, shares are yielding 1.8 percent and paying $4.04 per year. NXP’s payout ratio is under 50 percent, giving the dividend a solid level of security.
Despite a reasonably high yield and a sustainable payout ratio, NXP may not be a particularly appealing choice for dividend growth investors due to its inconsistent history of dividend raises. The current $1.01 quarterly payout has been in force since 2023.
The payout has certainly moved upward over time, this isn’t the first time that it has stayed stagnant for more than a year. As such, the lumpy dividend growth that NXP has produced may be less than attractive to investors focused on rising dividends.
Is NXP Semiconductors Undervalued?
With revenues and earnings having fallen consistently for over a year, it’s perhaps no surprise that shares of NXP Semiconductors have moved lower. However, the business appears to be very attractively positioned to take advantage of several long-term secular growth trends. Given that NXP still has a strong moat in RFID, NFC and automotive semiconductors, the coming several years could prove to be quite positive for the business.
At its current price, NXP may not prove to be massively undervalued. However, there does seem to be a decent argument for at least a modest level of undervaluation where NXP is concerned. Given the growth trends that the business is currently exposed to, NXP Semiconductors looks like it could be a solid long-term compounding stock that’s trading a bit below its probable intrinsic value.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.