Semiconductor stocks have come under fire this summer. U.S.-based chipmakers do substantial business in China, so all the talk about a trade war has weighed on hopes that sales and profits can continue to grow. Cypress Semiconductor (NASDAQ:CY) has been no exception within the uncertainty surrounding the industry. Shares have exhibited volatility and are still off highs reached back in March, but the company's second-quarter 2018 earnings report, issued on July 26, did a lot to put those fears to rest.

The raw numbers

Metric

Q2 2018

Q2 2017

Change (YOY)

Revenue

$624.1 million

$593.8 million

5.1%

Gross profit margin

37.5%

32.5%

5.0 p.p.

Operating margin

8.1%

1.5%

6.6 p.p.

Net income (loss)

$27.7 million

($16.9 million)

N/A

Earnings (loss) per share

$0.07

($0.05)

N/A

Data source: Cypress Semiconductor quarterly earnings. P.p. = percentage points. N/A = difference too great to be meaningful. 

Cypress' management had signaled to investors to expect a 2% to 6% year-over-year increase in sales, so results came close to the top of that guidance. However, gross margin was expected to top out at 37%. Exceeding that figure led to higher operating and net profits, distancing the chipmaker even further from the loss it had been running the last few years.

More importantly, results and the company's future outlook (discussed below) assuaged worries that sales to China would get negatively hit by a trade war with the U.S. That was a legitimate concern especially after fellow memory chip manufacturer Micron Technology found itself under a temporary ban in the world's most populous country. Cypress has not only avoided those problems to-date, but it looks like growth is about to pick up pace again.

An artist's rendition of the "Internet of Things." Phones, cars, homes, and equipment are illustrated getting hooked up to the internet.

Image source: Getty Images.

How to dig out of a hole

After a couple of big acquisitions over the last couple of years, Cypress has been clawing its way out of the red by growing its "connected products" business and cutting costs in its legacy products like memory chips. The strategy has been working, but early in the year business began to show signs of deceleration, putting the organization at risk of sliding back to a loss.

Having both lines of connected and memory chip business together has served Cypress well, though. As relationships with automakers and other industrial enterprises have expanded, these businesses have ended up placing orders with Cypress for both connectivity and memory products. As CEO Hassane El-Khoury put it in the company's second-quarter press release, Cypress "gives developers everything they need to create winning IoT (Internet of Things) products quickly and easily."

For the third quarter, results are expected to get even better. Management said revenue should rise 8% to 13% from the comparable period in 2017, an acceleration from the positive, if sleepy top-line results posted so far this year. Management anticipates that gross margin will land between 38% and 39%, which, combined with the higher revenue, is expected to result in earnings per share (EPS) of between $0.11 and $0.15. 

In sum, Cypress' second-quarter results were solid. Sales were in-line with guidance and profits beat expectations; but most importantly, signs are pointing toward a rosier second half of 2018. With shares still down from their highs, and trading at forward price-to-earnings ratio of only 12, it looks like a rally is in order.

Nicholas Rossolillo and his clients own shares of Cypress Semiconductor and Micron Technology. The Motley Fool recommends Cypress Semiconductor. The Motley Fool has a disclosure policy.