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Could Cypress Semiconductor Be a Millionaire Maker Stock?

By Leo Sun - Mar 7, 2018 at 8:30PM

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Will this little chipmaker generate multi-bagger returns?

Back in February 2016, Cypress Semiconductor ( CY ) hit an all-time low of $6.55 on concerns about its declining gross margins. But just a few months later, Cypress agreed to buy Broadcom's wireless Internet of Things (IoT) unit, which opened up significant new growth opportunities.

Shares of Cypress have nearly tripled since then, but the chipmaker still has a fairly low enterprise value of $6.6 billion. Could the stock deliver additional multi-bagger returns and become a millionaire-maker stock in the near future? Let's dig deeper into its business to find out.

An illustration of a processor.

Image source: Getty Images.

What does Cypress Semiconductor do?

Cypress is the top chipmaker in six markets -- Wi-Fi/Bluetooth combo chips for Internet of Things (IoT) devices, auto instrument cluster microcontrollers, auto NOR flash memory chips, SRAM memory chips, USB-C controllers, and other USB solutions. These niches are often overlooked by bigger chipmakers.

The company's core growth strategy, "Cypress 3.0", aims to turn the chipmaker into a "one-stop embedded solutions provider" for the IoT market. This strategy is working: Cypress noted that 80% of its revenues came from customers who purchased "two or more" product families last quarter.

What the bulls think about Cypress

Cypress is a great play on connected cars, which use its Wi-Fi/Bluetooth combo chips, NOR flash memory chips for ADAS (advanced driver assistance systems), USB-C charging solutions, and vehicle microcontrollers.

Cypress claims that a "basic" vehicle contains about $300 worth of semiconductors, but new "high-end" connected cars use about $1,000 in chips. That's why Cypress' auto revenues rose 16% last year, even as auto sales remained soft worldwide.

An illustration of the Industrial IoT.

Image source: Getty Images.

Another growth engine for Cypress is the Industrial IoT, which connects industrial machines to each other and the cloud. Cypress expects the total addressable market for industrial chips to grow at a compound annual growth rate (CAGR) of 10% between 2016 and 2021.

The strength of Cypress' industrial business, along with its auto and consumer units, boosted its IoT wireless connectivity revenues by 46% annually last year.

Cypress also expects the adoption of the USB-C standard, which boosted its wired connectivity revenues by 70% last year, to accelerate. The chipmaker controls 38% of the USB-C controller market, which it expects to grow at a CAGR of 89% between 2016 and 2021.

As for memory chips, Cypress controls 65% of the market for NOR chips, which are widely used in connected cars and industrial machinery. It produces the highest density serial NOR flash memory in the world with its "MirrorBit" technology. Cypress also sells programmable system-on-chips (PSoCs) for the industrial market -- which enable machines to "talk" to each other and synchronize with software platforms.

Analysts expect these growth engines to boost Cypress' revenues and earnings by 7% and 37%, respectively, this year. Those are high growth figures for a stock that trades at just 14 times forward earnings. Cypress also pays a solid forward dividend yield of 2.5%.

What the bears think about Cypress

The bears believe that sluggish auto sales, which are expected to remain weak all throughout the year, could offset Cypress' content share gains in new vehicles. If global economic growth stalls out, sales of its industrial chips would also decline.

Another issue is the cyclical nature of memory prices. Cypress' memory revenues benefited from cyclically high NOR and SRAM prices over the past year, but the overall growth of its memory chip business (down 1% sequentially last quarter) remains weak. If memory prices peak this year, Cypress' memory business could weaken even further.

The USB-C standard also remains fragmented, with various cables performing different tasks at different speeds. This fragmentation could result in the slower adoption of USB-C devices and throttle the growth of its wired connectivity business.

Lastly, the bears will claim that Cypress isn't a reliable dividend play, since it hasn't raised its payout since 2012. Cypress' payout ratio also remains negative. It posted a GAAP net loss of $0.28 per share last year, compared to dividend payments of $0.44 per share. However, those payments only used up 41% of its free cash flow over the past 12 months.

Could Cypress be a "millionaire-maker" stock?

I believe that Cypress still has room to run, and that its strengths offset its weaknesses. The chipmaker also remains a lucrative buyout target for larger companies invested in auto and industrial chips, like Texas Instruments.

Therefore, I believe investors who hold Cypress over the long term could see more multi-bagger returns, which makes it a potential "millionaire-maker" stock.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Cypress Semiconductor Corporation Stock Quote
Cypress Semiconductor Corporation
Texas Instruments Incorporated Stock Quote
Texas Instruments Incorporated
$193.38 (-0.10%) $0.20
Broadcom Limited Stock Quote
Broadcom Limited
$558.12 (1.03%) $5.67

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