You may not have heard of the Dutch chipmaker NXP Semiconductors (NXPI). It’s not exactly a household name, after all. When it comes to the markets, however, NXPI stock should be on the lips of serious investors across the globe.
It’s hard to really call a $22 billion company overlooked, but I do happen to think this stock isn’t getting the respect it deserves from Mr. Market.
Before getting to the five reasons NXPI stock is a steal at today’s prices, here’s some brief background on how the company puts food on the table:
A Crucial Supplier
So what exactly does NXP Semiconductors do that makes it so fabulous? Well, it makes the chips that go into some of the world’s most important technologies. You can find NXP components in car radios, smartphones and mobile payment technologies, credit cards, satellites, tablets, and even pachinko machines.
NXPI operates in two core divisions, High Performance Mixed Signal (HPMG), and Standard Products. HPMG is the more inclusive category, and the higher-margin area of the biz as well. It’s in HPMG that most of the exciting growth is taking place.
Here’s a gander at their business lines within HPMG, courtesy of NXPI’s most recent 20-F filing:
Click to Enlarge As for its Standard Products segment, those products are rather … standard. NXPI uses this division to hawk things like transistors and diodes. Not exactly the sexiest line of business, but one of the reasons NXPI stock has room to run is actually because of the margin opportunities in Standard Products … but I’ll get to that later.
Now that we know roughly what NXPI does, let’s touch on the five reasons it’s a killer stock to buy right now.
1) Killer Valuation
Valuation is easily the most compelling reason to buy NXPI stock today. While investors might be spooked by the stock’s trailing price-to-earnings ratio of 46, its forward P/E is just 13.5. According to Thomson Reuters, NXPI’s forward PEG ratio, which measures forward P/E to expected earnings growth, sits at just 0.5 — roughly a 30% discount to its own 5-year average of 0.8 and a whopping 70% discount to the S&P 500.
Thomson Reuters also gives NXPI stock a valuation rating of 8 out of 10, implying it’s far cheaper than most of the stock market universe.
2) Merger With Rival Freescale
Setting NXPI and its dirt-cheap valuation aside for a second, let’s take a look at the business itself. The company’s biggest development of the year was the announcement in March that it would be acquiring one of its main rivals, Freescale Semiconductor (FSL), in a $40 billion deal.
The new entity will become the fourth-largest semiconductor company in the world upon its approval, expected in the fourth quarter of this year. While the deal isn’t guaranteed to get regulatory approval, NXPI is doing everything it can to show that the acquisition won’t be anticompetitive. NXPI is even selling its RF Power business proactively in a good-faith move.
In short, Freescale can be thought of as that dreaded one-word mantra so often used in corporate-speak: “synergies.”
3) Huge End Customers
Go ahead, scroll up and take a look at some of NXPI’s main customers. You might notice Apple (AAPL), the largest company in the known universe, among the names. Also prominent are a plethora of other major players in the global economy: Hyundai, Panasonic, Samsung (SSNLF), Sony (SNE), Alcatel (ALU), Ericsson (ERIC), HTC, and Foxconn, to name a few.
Yes, it’s great for NXPI to boast a diversified clientele of corporate customers with deep pockets, but NXP is also one of the few companies in the world with the scale and manufacturing capacity to supply them.
4) Mobile Payments & Chip-and-Pin Technology
Now we come to the sexiest reason to be bullish on NXPI stock: It’s a big player in the growing world of mobile payments, most prominently via its near-field communications (NFC) chips, a requisite technology for services like Apple Pay and Google (GOOG, GOOGL) Wallet.
And hey, if you’re not buying the whole mobile payments thing, NXPI also does plastic. It’s a leader in the global shift from magnetic stripes to EMV cards, which have a physical chip inside of them and make transactions far more secure.
5) Margin Improvement
On top of all that, NXP Semiconductors is also improving its margins. (When combined with the synergies from the Freescale acquisition, these margin improvements should do wonders for the bottom line.)
Not that its margins need any help to speak of. In 2013, NXPI’s gross profit margin was 45.2% — 550 basis points above Apple’s gross margins today. No matter, in 2014 the chipmaker improved upon that already ridiculous figure, with gross margins of 46.8%. Last quarter NXPI improved again, with non-GAAP gross margins coming in at 48.7%.
Market share gains and product mix changes should continue to send these figures up even higher. Even its bland Standard Products segment is increasing margins by pushing higher-margin switches and transistors coupled with improvements in manufacturing efficiency.
In truth, NXPI could probably afford to make some sacrifices on margins in the Standard Products division, since it likes to sell clients its more commoditized products before introducing them to its higher-margin High Performance Mixed Signal offerings.
Going forward, I don’t see many stocks with the same combination of deep value, scale, and growth potential of NXPI. The stock has beaten earnings estimates in 11 of its last 12 quarters, and in the last three years, NXPI stock is up more than 250%.
Still, shares seem massively undervalued at just 13 times forward earnings.
Unless the Freescale acquisition is rejected and NXPI starts losing customers out the wazoo, I expect this stock will continue to crush the market over the next few years. Do yourself a favor and buy this stock before Wall Street realizes what it’s missing out on!
As of this writing, John Divine was long Oct 2015 $85 NXPI call options, Jan 2017 $90 NXPI call options, Jan 2017 $95 NXPI call options, Jan 2017 $105 NXPI call options and AAPL stock. You can follow him on Twitter at @divinebizkid or email him at firstname.lastname@example.org.