Cypress Semiconductor (NASDAQ:CY) posted solid fourth quarter numbers on Feb. 1 that beat analyst expectations on both the top and bottom lines. Its revenue rose 13% annually to $597.5 million, beating estimates by about $4 million, as its non-GAAP earnings grew 4% to $0.28 per share, topping expectations by three cents.
Nonetheless, Cypress' stock still dropped with the broader market over the next few days. I believe that dip makes Cypress -- which remains up about 25% over the past 12 months -- a solid buy for ten simple reasons.
1. A leader in six key markets
Cypress is the market leader in six high-growth markets: Wi-Fi/Bluetooth combo chips for Internet of Things (IoT) devices, auto instrument cluster microcontrollers, NOR flash memory chips, SRAM memory chips, USB-C controllers, and other USB solutions. These niche markets are often overlooked by bigger chipmakers.
2. A growing wireless IoT business
Cypress' core growth strategy, dubbed "Cypress 3.0", aims to turn the chipmaker into a "one-stop embedded solutions provider" for the IoT market.
That's why it bought Broadcom's (NASDAQ:AVGO) wireless IoT business in 2016. That acquisition helped Cypress post 46% growth in wireless IoT revenues in 2017, which exceeded its own target of 35%-40% growth.
3. An investment in connected cars
Pessimists often claim that soft auto sales could hurt automotive chipmakers like Cypress. However, Cypress offsets that weakness with content share gains in newer vehicles, which require more chips than older models. These chips include Wi-Fi/Bluetooth combo chips for connectivity, NOR flash memory chips for ADAS (advanced driver assistance systems), USB-C charging solutions, and auto instrument cluster microcontrollers.
Cypress notes that a "basic" vehicle contains about $300 worth of semiconductors, while a "high-end" model contains about $1,000 in chips. That's why Cypress' automotive revenues rose 16% in 2017, and why it expects the business to grow at a compound annual growth rate (CAGR) of 8% to 12% between 2016 and 2021.
4. The rising adoption of USB-C
The USB-C standard had a slow start, yet rising demand for its controllers still lifted Cypress' wired connectivity revenues by 70% during the year. Cypress currently controls 38% of this market, which it believes will grow at a whopping CAGR of 89% between 2016 and 2021.
5. A growing share of the NOR market
Cypress controlled 65% of the NOR memory market in 2017, but it expects to control 70% of it "over the next few years." That's because Cypress' "MirrorBit" technology enables it to produce the highest density serial NOR flash memory chips in the world.
In addition to powering connected vehicles, NOR chips are widely used in industrial machines in the Industrial Internet of Things (IIoT) market.
6. The growth of the industrial market
Cypress also offers a wide range of programmable system-on-chips (PSoCs) for the industrial market. These chips enable machines to "talk" to each other and sync with software platforms to improve operational efficiency. Cypress expects the total addressable market for its industrial chips to grow at a CAGR of nearly 10% between 2016 and 2021.
7. Content share gains across its portfolio
Last quarter, Cypress noted that 80% of its revenue came from customers who purchased two or more product families. This indicates that Cypress can keep growing its content share by bundling together its chips -- which will help it maintain market leading positions across its six key markets.
8. A declining debt load
Cypress also repaid a lot of debt, which reduced the ratio of its total long-term debt to EBITDA (last 12 months) from 4.3 in 2016 to a much more sustainable 2.3 in 2017. That was in line with its own target ratio of 2.0 to 2.5.
9. Solid growth and a low valuation
Analysts expect Cypress' revenue to climb 7% this year and 6% next year. Its earnings are expected to grow 37% this year and 16% next year. Those are high growth figures for a stock which trades at just 11 times forward earnings.
10. A decent dividend
Lastly, Cypress pays a forward dividend yield of 2.6%, which is much higher than the S&P 500's current yield of 1.8%. The company hasn't hiked that dividend since 2012, but it's still a nice bonus for patient investors.