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Better Buy: Cypress Semiconductor Corporation vs. Qualcomm

By Leo Sun – Sep 7, 2018 at 11:25AM

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Should you buy the smaller diversified chipmaker or the mobile chipmaking giant?

Cypress Semiconductor (CY) and Qualcomm (QCOM -1.83%) aren't direct competitors. Cypress produces a wide range of microcontrollers, memory chips, and wireless chips, while Qualcomm generates most of its revenue from mobile device chipsets and wireless patent fees.

Cypress and Qualcomm represent two different ways to invest in the semiconductor sector, which remains a solid growth market due to the growing number of connected devices. But which chip stock is the better buy?

The internal hardware displayed in a transparent smartphone.

Image source: Getty Images.

What do Cypress and Qualcomm do?

Cypress is the market leader in wireless IoT chips, NOR and SRAM memory chips, auto instrument cluster microcontrollers, and USB-C controllers. Many larger chipmakers often overlook these niche components, but they're widely used in the automotive, smart home, and industrial IoT markets. USB-C controllers are also often used in newer mobile devices.

Cypress splits its business into two segments: the MCD (Microcontroller and Connectivity Division), which includes microcontrollers, wireless chips, and USB products; and the MPD (Memory Products Division), which sells RAM, flash memory, and AgigA Tech memory products. MCD revenue accounted for 59% of its revenues last quarter, and MPD revenue accounted for the rest.

Qualcomm is the world's largest manufacturer of mobile SoCs (system on chips) for mobile devices. Its flagship Snapdragon SoCs bundle together an application processor, GPU, and baseband modem on a single chipset. It also sells stand-alone baseband modems to OEMs. This unit generated 73% of Qualcomm's revenue last quarter.

The rest of Qualcomm's revenue comes from its licensing business, which leverages its portfolio of wireless patents to collect royalties and fees from every mobile device maker in the world. Hoever, most of Qualcomm's net income comes from this higher-margin business.

Which chipmaker is growing faster?

Cypress' MCD and MPD units have grown steadily over the past year. Its MCD revenue rose 2% annually last quarter, its MPD revenue rose 10%, and its total revenue grew 5%. Cypress attributes that growth to its content share gains in connected cars, USB-C devices, smart home products, and other IoT devices.

A woman sits in a driverless car.

Image source: Getty Images.

Cypress expects its revenue to rise 11% annually and 7% sequentially (at the midpoint) during the third quarter. During its conference call, CFO Sam Thad Trent noted that figure was well above its "normal" sequential growth of 3% to 4% in previous third quarters. Trent also predicted "minimal impact from the trade wars and tariffs" on Cypress' core businesses. Analysts expect Cypress' revenue to rise 9% this year and 6% next year.

Qualcomm's chipmaking revenues grew just 1% annually last quarter, mostly supported by growing demand from Chinese OEMs. Its licensing revenues rose 25%, boosted by a $500 million payment from a license dispute and new 5G licensing deals. Its total revenues rose 4%.

Qualcomm expects its revenue to fall 7% annually (at the midpoint) during the fourth quarter. It didn't clarify the reasons behind the decline, but it's likely related to Qualcomm's ongoing legal clashes with Apple and its suppliers, which suspended all their licensing payments to Qualcomm last year, as well as fines from antitrust regulators. Apple also recently dropped Qualcomm's modems from its upcoming iPhones. Analysts expect Qualcomm's revenue to fall 3% this year and remain flat next year.

Profitability, valuations, and dividends

Cypress' non-GAAP net income surged 67% and its EPS jumped 57% last quarter. Much of that growth can be attributed to the integration of Broadcom's wireless IoT unit, which it acquired in 2016, and the expansion of its gross margins.

Cypress expects its earnings to rise 41% for the third quarter. Analysts expect its earnings to grow 51% this year and 11% next year. Those are solid growth rates for a stock that trades at just 11 times forward earnings.

Qualcomm's net income and EPS both rose 41% annually last quarter, mostly due to the aforementioned $500 million payment. However, it expects its non-GAAP earnings to slip 13% during the fourth quarter. Analysts are expecting a 15% drop for the full year, followed by 22% growth next year. Its stock currently trades at 16 times forward earnings.

Qualcomm is expected to tighten up its EPS with the $30 billion buyback it authorized following its failed bid for NXP Semiconductors. Cypress authorized a $450 million buyback plan back in late 2015, and has $210 million remaining in that plan.

Cypress pays a forward dividend yield of 2.6%, which is lower than Qualcomm's forward yield of 3.5%. Cypress doesn't consistently raise that dividend, but Qualcomm has raised its payout annually since 2003.

The winner: Cypress

Cypress and Qualcomm are both good semiconductor plays, but Cypress' steadier growth, stronger growth rates, and lower valuations make it the better overall investment. Qualcomm also faces unresolved lawsuits and regulatory probes, which makes Cypress a safer play.

Leo Sun owns shares of Apple and Cypress Semiconductor. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of Qualcomm and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Broadcom Ltd, Cypress Semiconductor, and NXP Semiconductors. The Motley Fool has a disclosure policy.

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