Please ensure Javascript is enabled for purposes of website accessibility

Cypress Semiconductor Is a New Breed of Chip Stock

By Nicholas Rossolillo - Updated Nov 1, 2018 at 3:54PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Numerous analyst calls for a slump don’t apply here -- at least not yet.

It hasn't been a great year for semiconductor stocks as numerous Wall Street analysts have warned about an impending slowdown in sales in the sector. Shares of Cypress Semiconductor (CY) haven't been spared, yet the company's modest expansion is showing few signs of slowing. As a big beneficiary of the movement to connect everyday items to communications networks, Cypress is making more changes to improve its business results and reward shareholders.

Slow-and-steady wins the race

Though Cypress hasn't posted record-breaking sales figures, that's OK. The chipmaker has been making consistent progress in its connectivity and custom application designs with a 12.2% and 10.7% quarter-over-quarter and year-over-year increase, respectively, during the third quarter of 2018. Though sales of memory products have slowed as of late (that's the segment that has had some analysts worried), progress hasn't been to shabby there either with a 1.6% and 12.4% quarter-over-quarter and year-over-year advance, respectively.

Those sales have led to big rebounds in Cypress' bottom line after a major overhaul of operations a few years ago.

Metric

Nine Months Ended Sept. 30, 2018

Nine Months Ended Oct. 1, 2017

Year-Over-Year Change

Revenue

$1.88 billion

$1.73 billion

8.7%

Gross Margin

37.6%

32.4%

5.2 p.p.

Operating Margin

8.6%

2.1%

6.5 p.p.

Earnings (Loss) per Share

$0.23

($0.14)

N/A

p.p. = percentage point. Chart data source: Cypress Semiconductor quarterly earnings.

Leading the way this year have been chip sales to industrial and manufacturing end-markets, especially the automotive industry. Profit margins in connectivity and custom solutions are also higher than those on memory products, and have longer-term growth rates. Cypress expects its legacy memory product sales to contract by 2% to 5% a year through 2021. In response to this development, the company had a few announcements to help boost business results.

An illustruation of everyday items such as a camera and smartphone in a series of hexagons as a web.

Image source: Getty Images.

Doubling down on connectivity

On the same day third-quarter earnings were released, Cypress said it will be starting a new joint venture with South Korean chip maker SK Hynix System Ic focused on NAND memory production. Cypress is offloading all of its NAND business -- a commoditized product subject to wild swings in supply and demand with low profit margins -- but will retain 40% ownership of the venture.

SK Hynix will manage the operations and pay Cypress dividends based on performance. While Cypress says it will lose about $186 million in annual revenues as a result, $3 million in annual operating expense will be transferred to the venture and the NAND division's negative impact on overall profitability will be eliminated. Cash flow of $80 million is expected from the new subsidiary over the next two years, meaning Cypress' free cash flow will actually improve as a result. The deal should be finished by the first quarter of 2019.

That announcement complements a couple others over the last few weeks. Cypress scored a new sales win with an undisclosed automaker providing digital instrument cluster solutions; and another agreement with chipmaker Arm was expanded to increase security features on Cypress' Internet of Things chipsets.

The offloading of the old memory product business will help further focus efforts on connectivity. That's part of management's Cypress 3.0 strategy -- a focus on value creation for shareholders rather than simple revenue growth. With the company's new connectivity products carrying higher profit margins and estimation that sales will continue growing around the same rates as they have been thus far in 2018, Cypress' slow-and-steady top-line expansion should continue to translate to an even faster expanding bottom line.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Cypress Semiconductor Corporation Stock Quote
Cypress Semiconductor Corporation
CY

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
316%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/05/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.