Shares of Dutch microchip designer NXP Semiconductors (NXPI -1.93%) have zoomed 75% higher in 2013, leaving the S&P 500's (not-so) meager 30% returns in the dust. What's the story behind NXP's market-crushing performance?
Let's make one thing perfectly clear up front: NXP's 2013 surge is not a bounce back from a disastrous 2012. The stock has nearly tripled since the start of that year.
NXP's surge might come as a surprise if you only think of it as a maker of Near Field Communications, or NFC, chips. That technology was supposed to invade smartphones in a big way and then kind of replace credit cards for everyday payment transactions, among other things. But when was the last time you bought a hamburger with your NFC-enabled phone? Exactly. So there's clearly something else to NXP's business.
NXP makes a range of industry-standard commodity chips, as well as very specialized high-performance mixed signal, or HPMS, processors. The so-called standard products division accounts for just 18% of NXP's annual sales and is shrinking slowly. But the HPMS segment is what sets NXP apart from the competition, and it is growing at an annual clip of 28%. Yes, NFC chips are included in the HPMS division.
Thanks to strong sales in the automotive and security markets, NXP beat earnings targets in all four of its quarterly reports this year. These chips power features like computerized car locks and entertainment systems, drive-by-wire throttle controls, and secure digital ID cards. NXP claims to be the market leader in keyless entry systems, silicon-based radio tuners, and many more submarkets.
So the NFC market hasn't soared like NXP investors hoped, but who needs mobile payment revolutions when in-car entertainment systems can drive the business?
