Cypress Semiconductor (CY +0.00%) delivered yet another round of impressive quarterly results at the end of July. It easily beat Wall Street's expectations and presented terrific guidance for the ongoing quarter.
Accelerating growth is a trend that Cypress could sustain for a long time thanks to its pursuit of fast-growing opportunities within the semiconductor space, as shown in the charts below.
Image source: Getty Images.
Tapping into the automotive future
Cypress currently gets 31% of its revenue by selling chips to the automotive industry. That segment of its business is clocking an annual revenue run rate of nearly $800 million this year, a step up from the $700 million in revenue last year. And it could be just the beginning as semiconductor content in vehicles is going to pick up in the coming years to enable connectivity, infotainment, and advanced driver assistance systems (ADAS).
IC Insights estimates that automotive will be the fastest-growing end market for chips.
Data from IC Insights. Dollar growth from 2016 to 2021. Chart by author.
Cypress is targeting automotive applications where chip demand is growing at a fast pace. For instance, infotainment systems are predicted to grow at nearly 11% a year through 2021, while ADAS demand is predicted to grow even faster at 24%. The automotive wireless connectivity market could clock an annual growth rate of 18%, according to the company's estimates.
Cypress has been able to score wins in all these areas. Pioneer has chosen the chipmaker's Wi-Fi and Bluetooth combo solution for its top-of-the-line infotainment receiver. Earlier wins include leading component manufacturers such as Bosch, Denso, and Continental, which chose Cypress chips to power ADAS solutions and other automotive electronics. These were the top three automotive component suppliers by revenue last year, so Cypress is striking the right partnerships to ride the growing demand for automotive semiconductors.
USB-C could give Cypress a massive boost
The proliferation of USB-C demand should give Cypress' revenue a lift in the coming years. The chipmaker claims that it commands 38% of this market, powering over 450 USB-C devices. Investors should know that this technology is gaining traction because of the various advantages that it delivers over traditional ports.
For instance, USB-C technology can boost smartphone charging speeds by 50%, and eliminate the many ports found on a laptop with a single solution. The company recently released a 7-port USB-C hub controller that can integrate the function of five chips into one. Cypress claims that this is an industry-first design, and that it will allow device manufacturers to slash costs of deploying individual ports by half, as well as reduce the size of the chipset.
Cypress counts the world's top five PC original equipment manufacturers as customers, so it has a solid chance of at least maintaining its strong presence in this space.
Data taken from Cypress' quarterly presentation. Chart by author. Market size in millions.
Cypress' current USB-C market share means that it could pull in just over $150 million in revenue from this segment this year. If it manages to defend its position in this space over the next three years on the back of strong product development, it could more than double its USB-C revenue to $300-million-plus levels.
This would be a substantial increase, as Cypress has generated nearly $2.4 billion in revenue over the past year.
Growing profitably
Cypress' growing clout in the markets discussed above has led to solid growth in the company's margins, because the chipmaker has been following a strategy of moving into nascent markets ahead of its rivals.
Also, the company can sell its connectivity chips into more than one Internet of Things vertical, such as automotive and smart homes, which helps bring down development costs. It's a strategy that has had rich results, as shown by the margin chart below.
Data from Cypress' quarterly presentation. Chart by author.
Its gross margin has increased impressively in recent quarters. It expects to clock 47% in gross margin during the third quarter of 2018, an increase of 4 percentage points from the prior-year period. It shouldn't be long before it is able to hit its long-term estimate of 50% in non-GAAP gross margin, and it could eventually exceed that target given the growth opportunities it is sitting on.
The company's earnings are expected to increase at a compound annual growth rate of 22% for the next five years. Given that the stock trades at 12 times forward earnings, which is lower than the industry average of 20, investors have an opportunity to buy into a fast-growing company at an attractive valuation.
