Please ensure Javascript is enabled for purposes of website accessibility

1 Key Cypress Semiconductor Stock Number You Must Know

By Anders Bylund - Apr 13, 2016 at 12:15PM

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

To truly understand this chipmaker, you need to know how efficiently its factories are running. Here's how.

Fab 25 in Bloomington, Minnesota. Image source: Cypress.

Cypress Semiconductor (CY) is not an easy stock to own. The microchip maker is coming off a difficult 2015, where revenues more than doubled thanks to the blockbuster acquisition of Spansion. But earnings and free cash flows turned negative. From on New Year's celebration to the next, Cypress shares fell a heart-stopping 32%.

All of these financial metrics are important, of course. But there's one unusual number that will give you a much deeper understanding of this company, and a better handle on where the stock might go next.

Say hello to Cypress Semiconductor's factory utilization. It's the one number you need to know above all others.

What is this?
Cypress runs a flexible manufacturing strategy, outsourcing some work to third-party chip foundries but also running its own manufacturing facilities.

This in-house chip-making lines can be a valuable asset when foundry partners are swamped with orders from a plethora of so-called fabless chip designers. Cypress also has the ability to research and implement improvements to its own manufacturing facilities, fine-tuning the process to the hilt. Sometimes it's cheaper to roll your own chips. And sometimes, those external foundries simply can't meet your exact needs on time, because their factories aren't set up to handle your specifications quite yet.

Hybrid manufacturing is not a very common strategy in the modern semiconductor industry, but Cypress doesn't stand alone. Texas Instruments (TXN -1.57%) is one famous example of a similar model, leaning on foundries when that makes sense but also running several highly capable chip fabs in-house. Like Cypress, TI slides the workload back and forth between these two options in response to market demands.

For all their benefits, company-owned manufacturing assets also come with a big downside: They're expensive to build, and also come with serious fixed costs.

That's why it's important to keep track of the factory utilization rate. In an ideal world, Cypress would keep its factories running at full speed at all times. Unless the foundries just don't have any capacity left over to handle the company's orders, 100% factory utilization would be a sign of absolutely optimal business conditions.

Where Cypress stands today
At the end of fiscal year 2015, Cypress was running its fabs in Minnesota and Texas at about 60% of maximum capacity. That's in line with the utilization levels in recent years. Spansion brought in additional business, but also came with its own set of manufacturing assets.

In a longer-term perspective, this is not necessarily a great ratio. Utilization stood at 75% at the end of 2011, and management complained about low utilization at that moment in time.

In other words, there's plenty of room for improvement, and the low utilization explains a lot of Cypress's disappointing returns in recent years. Gross margins tend to follow the utilization ratios with a slight delay, and share prices won't be far behind:

CY Chart

CY data by YCharts

Management expects the utilization ratio to drop in the short term, running at approximately 50% in the first quarter. Cypress is burning through excess inventories at the moment, and things will improve when that process is complete.

Currently, the company expects utilization to bounce back in the second half of 2016. Aside from matching market demands in a more organic fashion, Cypress is also migrating some products from third-party foundries to Fab 25 in Minnesota.

If all of this works out as planned, gross margins should improve in the long run. Look for more detail when Cypress reports first-quarter results, at the end of April or early May.

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

Texas Instruments Incorporated Stock Quote
Texas Instruments Incorporated
$167.62 (-1.57%) $-2.68
Cypress Semiconductor Corporation Stock Quote
Cypress Semiconductor Corporation

*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 service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/20/2022.

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.