NXP Semiconductors: Category Leader But Demand Outlook Uncertain

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NXP Semiconductors is a global leader in automotive chip solutions, generating over 55% of its revenue from the automotive sector.The stock has performed well, but excess inventories, expensive ...

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00:40 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4681526-nxp-semiconductors-category-leader-but-demand-outlook-uncertain><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>NXP Semiconductors is a global leader in automotive chip solutions, generating over 55% of its revenue from the automotive sector.The stock has performed well, but excess inventories, expensive ...</p>\n\n<a href=\"https://seekingalpha.com/article/4681526-nxp-semiconductors-category-leader-but-demand-outlook-uncertain\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU0170899867.USD","symbol_name":"EASTSPRING INVESTMENTS WORLD VALUE EQUITY  \"A\" (USD) 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ACC"},"translate_title":"恩智浦半导体：行业领导者，但需求前景不明朗","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"TSM":1,"IFNNY":1,"MBLY":1,"NVDA":1,"NXP":1,"NXPI":1,"AVT":1,"AVGO":1,".IXIC":0.9,"QQQ":0.6,"TQQQ":0.6,"SQQQ":0.6,"PSQ":0.6,"QID":0.6,"QLD":0.6,"03145":0.6,"MNQmain":0.6,"NQmain":0.6},"content_text":"NXP Semiconductors is a global leader in automotive chip solutions, generating over 55% of its revenue from the automotive sector.The stock has performed well, but excess inventories, expensive valuation, and negative forecast EPS and revenue growth suggest caution.NXP's recent earnings were mixed, and the stock's valuation has expanded significantly, making it a less attractive investment option.   FinkAvenueIntroduction NXP Semiconductors (NASDAQ:NASDAQ:NXPI) is a global leader in Automotive chip solutions that include radar systems, driver assistance features and electrification. The firm also provides chips under business segments of Industrial & IOT, Mobile, and Communication Infrastructure. The firm's products are used in everything from smartphones, 5G communications equipment, to factory automation devices. The firm's most important business line is in the Automotive sector, which generates more than 55% of company revenue. NXP holds about 8% of the global automotive semiconductor market by revenue, which makes it the second biggest player in the space. NXP is subject to secular tailwinds in the semiconductor industry and, as per their website, NXP sees their key markets of Automotive and Industrial growing at 13% & 9% CAGR through 2030.   NXP Investor Relations Situation The stock has performed well over the past 12 months with the share-price up over 43%. The shares have been boosted, no doubt, by flows into the semiconductor industry more broadly such as ETFs providing exposure to the Philadelphia Semiconductor Index. Flows have been predominantly driven by investors seeking exposure to leading AI-themed names like Nvidia (NASDAQ:NVDA), Broadcom (NASDAQ:AVGO) and TSMC (NYSE:TSM). However, I think a combination of excess inventories, expensive valuation and negative forecast EPS and Revenue growth warrants sitting on the sidelines for now and waiting for a better entry point. I am a fan of the company as a category leader in Automotive semiconductors and I believe management have displayed greater prudence than their peers such as Mobileye (NASDAQ:MBLY) in controlling channel inventory. NXP, like many semi-stock, experienced bumper years in 2021 and 2022 as pent-up demand from pandemic-induced supply-chain stress led to impressive revenue growth of 28% & 19%. However, an inventory build-up with the firm's direct OEM customers has required management to under-ship into the channel with channel inventories in the most recent quarter of 1.5 months sitting below the company target of closer to 2.5 months. When asked about the inventory situation during the Q4 earnings call CEO Kurt Sievers had the following to say about it:  We will only start to replenish when we see sufficient momentum in the market to justify that. So that means there is neither a guarantee that by the end of the year we hit the 2.5 inventory, which is our long-term target, nor will we do any fast or hectic steps here  (Kurt Sievers, CEO)  So as we can see there is considerable near-term uncertainty in projecting demand levels. The excess inventories sitting with customers mean the firm will be challenged to grow revenues until the situation resolves itself. I give credit to management for reducing their shipments into the channel to below historical norms. This action avoided a situation like what occurred at Mobileye, which led in January to 2024 sales guidance being dramatically reduced due to excess inventories. Shareholders were punished in that instance, with shares falling close to 25% on the day, a failure that I think can likely be attributed to very poor stewardship by the C-Suite. Contrast the Mobileeye situation with NXP's approach below. I think we should give credit where it is due to NXP for intentionally generating lower revenue in 2023 than they otherwise could have. Such an approach gives me confidence this is a management team that can be trusted to shepard shareholder capital.  our unit volumes were down by approximately 7% through 2023. We believe this underpins our view that we have intentionally under-shipped fundamental end demand in order to limit inventory build in the channel and at our direct customers. (Kurt Sievers, CEO)  Recent Earnings NXP reported full year 2023 earnings in February, which was well received by markets despite being mixed. Overall revenue was up just 1% year-on-year (due to deliberate under-shipping), while EPS fell by 3%. However, earnings were better than analyst estimates that had been steadily reduced following Mobileye earnings in January. This pointed to a dramatic slowdown in autonomous driving technologies and advanced driver-assistance systems (ADAS) products. Management guided for Q1 revenue to be flat at the midpoint of the guidance range. This soft outlook is primarily a function of the excess inventory situation we already discussed. Analysts have been continually downgrading EPS forecasts for 2024/2025 for the past two years. So while NXP might deliver an earnings beat in Q1, it will be against a much lowered target.   Earning Revisions (Seeking Alpha) Valuation Since October 2022, the stock price is up a whopping 75% in the face of weakening earnings and significant uncertainty in the demand outlook. Indeed in the last 12 months alone the stock has jumped 43%. I think given the good run the stock has experienced, now would be an appropriate time to pause and wait for a better entry point. The price performance has been solely a function of the valuation multiple expanding. The business fundamentals are not in place to support further upside in my view. The stock currently trades on a forward P/E of close to 18x, which represents about a 15% premium to its 10-year average. As recently as November 2023, we could have snapped up the stock at a much more reasonable 12x earnings. I think now is the time to display patience, as over the last decade the stock has offered us multiple opportunities to buy at a high single digit or low double digit multiple. All investors know that cash is king and I don't find the firm's current 4.2% yield particularly compelling. NXP has a solid history of growing per share FCF with a 10 year CAGR of 7.6%. In the last five years, investors have had multiple opportunities to buy into this growing stream of FCF at a yield closer to 6% - 6.5% so I think holding fire for now is the best strategy.   Valuation vs 10-year history (Koyfin)For my valuation of the stock, I applied a two-stage DCF approach, which I think is appropriate given the business will be dealing with inventory normalization for the next few years. Once inventories return to historical levels, I think the stock could be well placed to see a re-acceleration of growth in earnings and dividends. I model 7% earnings growth for the next 5 years in-line with analyst estimates. For the second stage, I model a generous 15% growth reacceleration and, for my exit multiple, I use 15x which is in-line with the 10 year average. I note that my second stage growth of 15% is in excess of the company's investor day target of 8-12% growth. I model for higher than historical growth accounting for the potential upside related from AI application, particularly in autonomous driving. I think it is prudent to assume that full autonomous driving will take until at least 2030 to ramp given the greater regulatory scrutiny vs. AI applications in enterprise software for instance.  My estimates suggest the stock is currently overvalued by about 10%. I recommend a HOLD because I think investors will be able to pick up shares at a more reasonable valuation if they sit on their hands for now.   Two Stage DCF (Author)At present I think there are better valued options in the auto semis space such as Infineon (OTCQX:IFNNY), which trades on a lower multiple despite boasting higher forward and historical revenue growth, coupled with higher expected EPS growth in 2024. I would attribute at least some of this valuation difference to ETF flows tracking Philadelphia index, of which Infineon is not a constituent.   Seeking AlphaRisks NXP operates in the semiconductor industry which is highly cyclical by nature. The industry historically has displayed a tendency to fluctuate between over and under-supply with capacity additions often made at cycle peaks, only for demand to fall shortly thereafter. In its 10-K filing, NXP references 1997/1998, 2001/2002 and 2008/2009 as periods in recent memory where this dynamic played out. Indeed, management appear to have learned from the past in the 2023 chip down-cycle by displaying better inventory discipline than peers. However, even with strong management, investors must be aware of the cyclical risk a stock like NXP possesses. NXP faces concentration risk among its customers, in 2023 Avnet (NASDAQ:AVT) alone accounted for 21% of revenue. Avnet is a distributor of NXP products, so while I don't see the relationship as a particularly risk, I think investors in NXP must also be cognizant of Avnet's fortunes also. Conclusion In conclusion, while I am positive about the long term prospects for the firm and I think management have done their best to manage inventories through a difficult period of customer digestion, I struggle to justify buying into the stock at present.  I would not be surprised if we get a pull back in the stock within the next 12 months which should present us an opportunity to enter at a more reasonable valuation. Buoyant demand for semiconductor stocks has seen NXP rise with the tide and become expensive relative to history despite an anticipated near term flat to negative earnings outlook. This outlook, coupled with lingering uncertainty regarding customer inventory levels and the duration required for that dynamic to normalize, leads me to advise near-term caution on the stock.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2424280817"}