Bull Of The Day: NXP Semiconductors (NXPI)

Daniel Laboe
·4-min read

The technology sector is blasting off in the wake of the first global pandemic in over a century. The world has been scrambling to stay functional while practicing self-isolation. Tech has been the saving grace of the COVID-19 pandemic allowing society to work, shop, and be entertained without walking out their door. Semiconductors are at the heart of every advanced technology, from your smartphone to self-driving cars.

The 4th industrial revolution is upon us, and well-positioned chip makers are poised to explode out of this pandemic. NXP Semiconductors (NXPI) is one of those businesses primed to take-off through the roaring 20s, and it's still trading at a reasonable enough price to justify a long-term investment today. Analysts have been increasingly optimistic about this enterprise's future. Following management's guidance boost in Monday's Q3 earnings release (October 26th), NXPI was propelled to a Zacks Rank #1 (Strong Buy).

The Business

NXP Semiconductors is a Dutch chip innovator that employs 11,200 engineers across 23 countries. This enterprise controls the #1 worldwide position in chips for the identification industry (bank cards, e-governments, transportation, and access management cards), automotive, RF power transistors, and several other cutting-edge segments.

This innovation-driven company is on the front lines of autonomous driving and smart automobiles, with its automotive segment making up 47% of NXP's 2019 revenue. Its other divisions include industrial & IoT, mobile, and communication infrastructure, in that respective order of topline drivers.

Below is a breakdown from NXP's latest investor presentation of each segment's 2019 sales allocation and growth profile that the business expects from these divisions over the next 3 years.

Financials

This chipmaker has been hit by some strong, but temporary, pandemic related headwinds, which have caused some significant top and bottom-line declines. In fact, the company has been experiencing year-over-year revenue declines for the past 8 quarters. This temporary decline is the nature of the highly cyclical semiconductor space, but NXP is getting ready to springboard back into robust growth with the 4th industrial revolution paving the way.

This past quarter illustrated precisely that, with quarter-over-quarter growth of 43%, 18%, and 32% from automotive, industrial & IoT, and mobile, respectively. Management is anticipating year-over-year sales growth next quarter for the first time in 2 years, and with its consistently conservative guidance, I have no doubt it will reach and go beyond this goal.

The enterprise is rising out of the ashes of the pandemic stronger than ever, and its current share price points to opportunity.

NXPI Levels to Watch 

NXPI has had a robust recovery from the lowest level it hit on March 18th. This stock has been recently tracking quite well with the broader semiconductor industry, represented by the iShare Semiconductor ETF (SOXX) in the chart below (orange line).

NXPI hit its all-time high earlier this month, and yesterday it fought against the broader market trends after dipping below its 50-day moving average (blue line), which sits at $129 a share. These shares undoubtedly have buyers and have caught a bid at this support level.

If the stock continues to fall, look for support at $120 and $115. At these prices, I would not hesitate to purchase NXPI. And for those apprehensive investors out there, not only does this stock offer sizable capital returns but an over 1% annual dividend.

Final Thoughts

With a management team driven by returning capital to its investors, I do not doubt that this long-term investment will yield you the returns you are looking for. 14 out of 19 investors are calling this stock a buy today, with no sell ratings. If you can stomach some of the short-term volatility catalyzed by next week's election and the second COVID wave, I believe you will be happy with the results that NXPI provides your portfolio.

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