Dutch-Texan semiconductor maker NXP Semiconductors (NXPI 4.18%) has not been immune to the COVID-19 market panic of 2020. Market makers are treating NXP like a redheaded stepchild.
It's downright difficult to find another major semiconductor stock that has suffered as much as NXP in the coronavirus era. Share prices fell 42% over the past month, and you can pick up shares at bargain-bin valuation ratios like 8.4 times forward earnings or 7.1 times free cash flow.
All of this would make sense if there were something fundamentally wrong with NXP. That's not the case at all, and the company should come back swinging when the virus-based market panic subsides.
Image source: Getty Images.
What's wrong?
The first question on every investor's lips these days is how the company will hold up during the COVID-19 pandemic. NXP held a conference call in early March to address this important concern.
At the time, the virus's impact on NXP's business was happening mostly in China and amounted to a first-quarter revenue drop of roughly $100 million. To put that projection into perspective, NXP's total sales in the first quarter added up to $2.1 billion. Management's guidance had been pointing to roughly 6% year-over-year growth, or approximately $125 million higher revenues. Now that the virus has escaped China and become a global pandemic, the final revenue hit will likely come in a bit higher.
Automakers are closing down their production lines in response to the coronavirus, slamming the brakes on NXP's most important target market. Automotive computing products accounted for 47% of NXP's total revenues in 2019.
So the next quarter will be difficult, and the weakness may stretch into the second and third quarters of 2020 as well. It all depends on how long the coronavirus threat continues to cause work stoppages.
Meanwhile, NXP has a cash stockpile of approximately $1 billion and another $1.5 billion of untouched credit facilities. It would take a very long market blackout to exhaust all of that dry powder. And while the manufacturing lines aren't rolling, automakers and other industrial clients are getting some future product development work done through video meetings and engineers working from home. Even in this dramatic lull, NXP's revenues won't drop to zero.
What's next?
Here's the thing: NXP is an established market leader in several important markets, including self-driving systems and sensor packages. NXP is not the only available alternative, but all of its rivals are wrestling the same coronavirus demons, and I see no signs of NXP losing market share here. When the world goes back to work, the automotive and industrial component orders will come back in. The solid balance sheet will keep the lights on until then.
So NXP and its investors -- including yours truly -- will slog through some dark times as the virus situation evolves. But a lot of that upcoming pain is already priced into NXP's stock. The deepest market bottom might still lie ahead, but market timing is a difficult game to play.
Remember when fellow semiconductor maker Qualcomm (QCOM 1.41%) wanted to buy this company for a cool $44 billion? NXP's enterprise value stands at a skimpy $29 billion today. Times are tough, and NXP's stock price has already taken more than its fair share of price cuts to account for this dark market reality.
Long story short, this is a great time to buy NXP Semiconductors stock.
