Silicon Valley-headquartered Cypress Semiconductor (Nasdaq: CY) has suffered a 25% drop in stock price over the past 52 weeks. Although the stock has rallied somewhat from last month's lows, shareholders haven't had much to celebrate. Do this small-cap company's woes mean that it's the time to add Cypress to your portfolio, or should you stay away from this tech pick?
Mixed signals
Amid small- to mid-cap semiconductor providers, Cypress competes with Integrated Device Technology (Nasdaq: IDTI) in the memory chips space and Atmel (Nasdaq: ATML) and Synaptics (Nasdaq: SYNA) for touchscreen and mobile revenues.
|
Company |
P/E |
Net Margin |
Research & Development / Revenue |
Return on Investment |
|---|---|---|---|---|
| Cypress | 33.7 | 6.4% | 23.8% | 25.7% |
| Atmel | 15.6 | 10.7% | 18% | 17.2% |
| IDT | 15.5 | 9.7% | 31.9% | 11.3% |
| Synaptics | 19.4 | 9.9% | 22.3% | 13.8% |
Sources: Yahoo! Finance, Motley Fool CAPS, and author's calculations.
Cypress' valuation should set off warning lights, especially in light of its significantly lower net margin -- although the company's return should help its case. Its R&D commitment further boosts Cypress' appeal given its place in a fast-paced industry driven by innovation and evolving products.
Cypress' 3.7% dividend yield is far more concerning, especially given that none of those aforementioned rivals offers a dividend at all. Cypress isn't a quintessential dividend stock by any means, and growth investors could get far more value out of the company injecting cash into strengthening its financial foundation. Given that the company holds considerable debt -- it sports a debt-to-equity ratio of more than 61 -- the high dividend seems to me an unwise throwaway of capital better utilized elsewhere.
Staying ahead of the trends
The company smartly targets growing markets and adapts to new technologies. Cypress' Programmable System-on Chip product line has spearheaded its drive into innovative technologies. Development of these chips has opened up a potential $15 billion market in that space alone.
Clearly, Cypress has its finger on the pulse of future technology, reaching out to programmable systems and mobile devices alike. The company's touchscreen products populate smartphones, tablets, and more, giving Cypress a lucrative stake in the growing mobile market. Cypress also partners with NVIDIA (Nasdaq: NVDA) to provide touchscreen designs for Android devices, which command a 68% share of smartphone sales.
All in all, Cypress still trades well below its six-month highs and could entice optimistic growth investors if the company builds upon its innovative track record. If you're looking for stability, however, keep an eye on Cypress -- but hold off on jumping in.
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