Before we get into the nitty-gritty comparisons between two respected makers of embedded processors, let me make one thing perfectly clear.
NXP Semiconductors (NXPI 0.84%) is not merging with Qualcomm (QCOM -0.42%), even if Chinese regulators suddenly opened up to that idea. That dream is over. The original agreement has been canceled, the $2 billion breakup fee has been paid, and both companies have been spending billions of dollars on share buybacks that just don't leave much room for restarting the whole application process.
With that quirk out of the way, let's just get on with weighing NXP against Cypress Semiconductor (CY) on each company's merits as a stand-alone business.
Both Cypress and NXP make a mint in the industrial and automotive computing markets. For Cypress, these two segments accounted for 51% of the company's third-quarter revenue. At NXP, automotive sales alone stand for 47% of the company's quarterly revenue, while industrial plus Internet of Things products gather another 20% of the total top line. In both cases, industrial and automotive products are the fastest-growing market segments available to these companies.
Now, NXP is the established leader in automotive chips with a $4.4 billion annual revenue stream in this sector. Cypress' automotive exposure is far smaller at roughly $800 million a year, but the company claims to be the world-leading supplier in certain niches such as microcontrollers for in-car instrument clusters and rugged NOR flash memory chips. We're looking at two head-to-head rivals here, just with different economies of scale and market approaches.
NXP is the far more profitable business here. The company commands a 51% gross margin while converting 28% of incoming revenue to net earnings. Cypress has to settle for a 44% gross margin and barely-there 2.2% net margins.
Cypress saw its profit margins plummet in 2015 when the company merged with smaller NOR memory and programmable-chips specialist Spansion. Integration issues plus Spansion's less profitable product portfolio added up to slimmer profits. The Cypress you see today is indeed a solid provider -- of relatively commoditized components.
NXP's automotive solutions span the entire vehicle, with a heavy focus on the emerging trend toward autonomous driving. CEO Richard Clemmer sees that specific subsector as NXP's strongest growth driver over the next five to seven years. The company also has a strong presence in power controllers for electric vehicles, which should provide another solid growth trajectory as the car industry moves in that direction.
The takeaway: NXP will probably serve you better
NXP holds almost all the aces in this matchup. It is the more profitable company, serving a larger end market, and trading at lower valuation ratios across the board.
Cypress might serve you better if you're looking for a more generous dividend policy, holding a lead of 3.2% versus 1.2% when it comes to dividend yields. Otherwise, I would heartily recommend picking up NXP shares while they're still trading at these busted-merger discounts -- even if fellow Motley Fool contributor Leo Sun sees a huge takeover target painted on Cypress.
Thanks for that, Qualcomm.