Yahoo Finance 4 Reasons to Buy Cypress Semiconductor’s Latest Dip
Shares of Cypress Semiconductor (NASDAQ: CY) dipped on Sept. 24 after Morgan Stanley lowered its price target from $15 to $13 while maintaining its "underweight" rating on the stock. The firm claims that Cypress' margins and earnings could contract in 2019 as NOR and NAND memory prices hit a cyclical peak.
Investors should take that gloomy forecast with a grain of salt, since Morgan Stanley is bearish on the entire semiconductor sector. They should also note that Cypress' niche chips are better insulated from cyclical headwinds than other mainstream chips. Let's examine four reasons investors should buy, not sell, Cypress' stock after this pullback.
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1. Understanding Cypress' memory markets
First and foremost, Cypress doesn't compete against memory chip giants like Samsung (NASDAQOTH: SSNLF) and Micron (NASDAQ: MU), which lead the traditional NAND and DRAM markets. NAND chips are used in flash memory devices like SSDs and SD cards, while DRAM chips are used in RAM chips for PCs and mobile devices.
Those two markets are approaching cyclical peaks as supplies gradually outweigh market demand. However, Cypress produces NOR Flash, NAND Flash, SRAM, nvSRAM, and F-RAM chips for embedded systems like industrial machines and connected cars.
Cypress relies on content share gains in those markets, rather than raw pricing power, as machines become more complex and require more chips. In a previous investor presentation, Cypress noted that a "basic" vehicle contains about $300 worth of chips today, but higher-end connected cars require about $1,000 in chips.
Cypress is the market leader in the NOR and SRAM markets, which gives it better pricing power than mainstream memory chipmakers like Samsung or Micron. It's also the market leader in Wi-Fi/Bluetooth combo chips for Internet of Things (IoT) devices, auto instrument cluster microcontrollers, and USB-C controllers. That gives it the ability to cross-sell its components in bundles to boost its overall revenues per customer.
2. Riding the tailwinds of two high-growth markets
Cypress' NOR chips power many ADAS (advanced driver-assistance systems), which are now often installed in new vehicles and bundled with its auto instrument cluster microcontrollers. This makes Cypress a solid play on driverless vehicles -- which could hit most public roads within the next few years.
Image source: Getty Images.
Cypress will also benefit from the growth of the Industrial IoT (IIoT) market. Zion Market Research estimates that the global IIoT market will grow from $145.8 billion in 2017 to $232.2 billion in 2023. The growth of the auto and industrial markets should shield Cypress' core memory products from any significant price declines.
During last quarter's conference call, Cypress CEO Hassane El-Khoury stated that the company was "far less vulnerable to the pricing gyrations" than other chipmakers within the memory market; over 70% of its storage revenues came from customers on long-term contracts, and about half of its NOR revenues came from the high-growth automotive industry.
Cypress also believes that its automotive revenues will ramp up in 2019 as new connected cars hit the market, which directly contradicts Morgan Stanley's bearish forecast. Cypress CFO Sam Thad Trent also believes tariffs and trade wars would have a "minimal impact" on the company's margins -- and that the company's margins could even expand.
3. A low valuation and a high dividend
Wall Street expects Cypress' revenue and non-GAAP earnings to rise 6% and 11%, respectively, next year. Those are respectable growth rates for a stock that trades at just 10 times forward earnings. Moreover, Cypress' growth should accelerate over the long term on the growth of the automotive and industrial markets. To top it all off, Cypress pays a decent 2.8% forward dividend yield.
4. An obvious takeover target
Cypress dominates niche memory technologies in high-growth markets, it has a low valuation, and an enterprise value of just $6.6 billion. Those factors make it a lucrative takeover target for larger chipmakers that want to strengthen their presence in the auto and IIoT markets.
Obvious suitors include Qualcomm, which desperately needs to diversify its business away from mobile devices, and Texas Instruments, which produces a wide range of analog and embedded chips for the automotive and industrial markets.
Be greedy when others are fearful
Many investors seem to be tossing Cypress out with Micron, which recently disappointed investors with a gloomy revenue forecast and a grim warning about tariffs hurting its margins.
But that's a huge mistake: Cypress sells different types of chips, relies more on content share gains than pricing, and is well-insulated from cyclical declines and trade tensions. Therefore, value-seeking investors who buy Cypress after its latest dip could be well-rewarded over the long term.
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Leo Sun owns shares of Cypress Semiconductor. The Motley Fool owns shares of Qualcomm. The Motley Fool recommends Cypress Semiconductor. The Motley Fool has a disclosure policy.
