Please ensure Javascript is enabled for purposes of website accessibility

Is NXP Semiconductors a Buy?

By Anders Bylund – Sep 18, 2019 at 9:23PM

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

The Dutch leader in automotive computing solutions looks downright cheap, even after a 47% gain in 2019.

Dutch microchip maker NXP Semiconductors (NXPI -0.52%) had a rough time in 2018, but the company is roaring back to life this year. The stock has gained a market-crushing 47% year-to-date. Investors are faced with a difficult question at this juncture: is NXP a good investment after these massive gains, or is it better to take a step back until the red-hot stock cools down a bit?

Let's talk about that.

What's the big idea behind this company?

The proposed blockbuster merger with Qualcomm (QCOM -0.04%) was called off at the last minute, hamstrung by simmering trade tensions of the highest order. The reason Qualcomm wanted to invest $44 billion in this company remains unchanged.

NXP is the gold standard for automotive computing, leading that high-growth sector in several sub-categories. From traffic sensors and radar systems to self-driving controller packages and infotainment systems, NXP is the player to beat. Autonomous driving keeps moving deeper into the mainstream and even perfectly normal cars are growing their computer-controlled systems. This was the standards-setting position that Qualcomm wanted to acquire above all else.

Furthermore, NXP is firing on all cylinders at the moment. Operating margins are running at a multi-year high of 28%, carrying over to a 23% bottom-line profit margin. Inventories sit at a lean 5.4% of NXP's total assets, the company is paying down its debt balances, and there's even room for a modest dividend with a 1% yield in the current financial plan.

What's not to love?

Computer rendering of a sleekly modern car, driving on a road made up of ones and zeroes.

Image source: Getty Images.

What about the valuation?

This stock might have been expensive after this year's huge gains, but that's not how things worked out at all.

NXP shares are currently trading at 16 times trailing earnings, 12 times forward estimates, and 10 times its free cash flows. Those valuation ratios range from bargain-bin discounts to modest middle-of-the-road readings. I can't find a single metric that would indicate and overbought, overvalued market darling. This is actually one of the best bargains to be found among large semiconductor stocks today. For example, NXP is far more affordable than erstwhile suitor Qualcomm, which trades at 28 times trailing earnings and 19 times forward estimates.

NXP trades nearly 20% below Qualcomm's proposed buyout price, and for no good reason.

Yep, that's a buy

NXP gives you a vibrant company at the very heart of one of the most explosive growth industries on the market today, married to deeply discounted share prices. It's a no-brainer buy today because this exciting market leader clearly deserves a richer valuation.

Anders Bylund owns shares of NXP Semiconductors. The Motley Fool owns shares of Qualcomm. The Motley Fool recommends NXP Semiconductors. The Motley Fool has a disclosure policy.

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

NXP Semiconductors N.V. Stock Quote
NXP Semiconductors N.V.
NXPI
$150.22 (-0.52%) $0.79
QUALCOMM Incorporated Stock Quote
QUALCOMM Incorporated
QCOM
$114.79 (-0.04%) $0.05

*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
332%
 
S&P 500 Returns
104%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/30/2022.

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.