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Why Cypress Semiconductor Stock Is Down in 2018

By Nicholas Rossolillo - Nov 19, 2018 at 10:23AM

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All chipmakers are getting punished.

In spite of a return to profitability and sales that continue to rise, shares of Cypress Semiconductor (CY) are down 10.6% through mid-November. Among the negatives outweighing Cypress's positive momentum are trade tensions, a slowdown in the digital memory business, and concerns over an industrywide pullback in 2019.

When good progress isn't good enough

Over the past few years, Cypress has transformed itself from a maker of commoditized memory chips into a specialized manufacturer and designer of programmable and connectivity solutions. While supply and demand for digital memory continues to send companies specializing in their production on a roller-coaster ride, Cypress has enjoyed steady growth over the last few years.

Revenue through the first three-quarters of 2018 was up 8.7%, and this year will be the first full-year return to net profitability in years. The key to Cypress's success has been its focus on emerging technologies, especially when it comes to solutions for industrial sectors like the auto industry and Internet of Things (IoT). Those segments have been growing by double digits the last few years.

An artist's rendition of the Internet of Things. Common everyday objects are displayed in honeycomb cells, representing them getting hooked up to the internet.

Image source: Getty Images.

However, Cypress still derives a third of its total sales from memory chips -- a division that has cooled off after a surge in prices since 2016. Sales growth has come to a halt, and profitability from memory is slim to none. To address that problem, Cypress recently announced a new joint venture with South Korean firm SK Hynix to which Cypress will contribute its volatile and problematic NAND memory business. That will cut expenses and allow Cypress to reap dividends from the venture when it is doing well, as SK Hynix will assume management of the new joint business.

Despite the further sharpening of focus on the best-performing segments, the stock has suffered. A trade war between the U.S. and China has kept optimism in check as the link between the two countries is a crucial part of the semiconductor manufacturing chain. Some Wall Street analysts have also repeatedly contended that 2019 could bring a big slowdown in the semiconductor industry, even though guidance from most chipmakers (Cypress included) remains mostly optimistic.

One cheap stock

All of the bad press has resulted in a down year for Cypress shares, even though its growth story remains in force, and profits are on the rise. For the last few months of 2018, management said it expects revenue to be between down 2% and up 3%, and for earnings to extend their run higher thanks to better overall profit margins.

The fourth quarter is usually a slow one for Cypress, so investors seem to be overly pessimistic on the stock. As of this writing, forward price to earnings sit at a lowly 10.6. That's a real bargain if Cypress Semiconductor's new identity as a specialized manufacturer of next-gen solutions keeps yielding strong results.

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