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Why NXP stock fell after the chip maker reported an earnings beat

Truist Securities Managing Director Will Stein joins Yahoo Finance Live to discuss NXP earnings, its share buyback program, and the outlook for chip shortages.

Video transcript

- Welcome back to Yahoo Finance Live, everyone. We're continuing to keep a close eye on shares of NXPI here after the bell. They've been moving higher and now in fractional declines here. This is after the company has reported its most recent earnings revenue that came in at-- for the quarter, for the fourth quarter, at least, they saw $3.04 billion that was up 21.2% year over year. They also announced their full-year record revenue of $11.6 billion.

To break down these results a little bit more with us, we've got Will Stein, who's the manager and director over at Truist. Will, let's just dive right into it. We're taking a look at the actual versus the estimates. The shares are fractionally lower here in after hours. What do you believe investors are latching onto with this report?

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WILL STEIN: Yeah, so if you'll notice, the shares traded up initially, which is the correct read based on the fundamentals that the company recorded for the quarter and guided. However, when you read through the details of the press release, you find that the company disclosed that its auditors identified a material weakness in its controls. The company does not believe this is going to result in any restatement of financials. But a material weakness tends to be a fairly important thing for investors to focus on. I think that's what's dragging the shares this afternoon.

- Yeah, that is an important thing to button down, though, those controls and procedures. But I want to talk to you about NXP and the semiconductor space overall. We talk a lot about the chip shortage, but also interest rates factor into a lot of what we're talking about. I'm just wondering, what's your assessment of the semiconductor industry for the current year? We've seen a lot of the stocks get battered so far, bouncing back over the last couple days but [INAUDIBLE] start to the year.

WILL STEIN: Yeah, so we-- we provided an outlook piece towards the end of last year. And that was to recognize that we are clearly in the back part of a cycle, right? So the semi industry saw peak growth in the second quarter of '21. So we've already been in a fading year-over-year growth situation already for a couple of quarters. We expect that to persist through 2022 as well.

However, slowing growth doesn't mean slow growth, and it doesn't mean a collapse of the cycle. We believe that as growth moderates as we go through the year, and we see that back half of the cycle and revenue decline-- not revenue decline but year-over-year growth declines, we think there's still going to be upside pressure to numbers because demand is still in excess of supply. So we think that as companies can eke out a little bit incremental capacity, and they get better pricing, we'll still-- we'll still see upsides as we progress through the year. So we're bullish on the group, and we continue to have that view.

- You know, as we continue to evaluate the broader chip sector and the year or years of investment that we may be looking at going forward from this point with new factories for fabrication being brought online, for NXP, where do the largest prospects still stand in their segment approach that they have?

WILL STEIN: Sure, so the company has four segments that it discloses. The ones that are most supportive of-- of significant growth over the next few years are in the automotive end market, which is the biggest end market-- it's the-- the one that investors tend to pay the most attention to for this company-- and the industrial and IoT as they call it. This is the-- the long-awaited Internet of Things that is really delivering very good growth for several semi companies. But XP is particularly well-positioned because of its combined products of microcontrollers and connectivity assets.

- And what about its suppliers. I'm looking at Taiwan Semi is one of its biggest suppliers and its customers. How does it fit into the landscape here? Who-- who is dependent on them for these chips that they're making?

WILL STEIN: That's a great question. On the automotive side, they would typically transact with what are called the tier-one automotive companies. But their end customers, and the way I think the company tends to think about it, is that the customers are really the OEMs, so the Fords and GMs and VWs and the like, right? So on the automotive side, those are the biggest customers, right? It's the global OEMs really.

And the industrial IoT end market or that segment of the business, it's really a very different story. It's really very fragmented across a very large number of customers. It tends to be very distribution-centric and very dependent on production in China. So it's a very different business from the automotive one.

- The second largest growth in the industrial and IoT segment here, you know, considering where we saw that growth come in year over year, 29% growth in that particular segment, where can they continue to see some of the opportunity in the year ahead, I suppose, to continue kind of that neck-and-neck battle with the other segment that we talked about in the automotive space and especially considering that it is even, despite the growth that they've seen, you know, one third roughly-- rough numbers here-- of the size of that automotive segment?

WILL STEIN: Yeah, I think there's an important what I'll call a misunderstanding among many investors and the public about shortages in semiconductors. So let me explain for just a minute. The automotive end market tends to get quite a bit of attention when it comes to these shortages. And I think a big part of the reason is the number of Americans that are affected in terms of jobs when these factories have shutdowns.

However, the shortfalls in the much broader, much more diversified industrial end market I believe are even more severe than the shortages in automotive. It doesn't get the same sort of press. It doesn't get the same sort of attention. It's not like you can name your 5 to 10 OEMs in industrial that are going to be shutting down factories as a result of shortages. It's a much greater number, much smaller factories and smaller demand drivers. But they're a very important supplier to a wide number of industrial customers. And the shortages there are even worse is my best understanding.

- Will Stein, Truist Securities managing director joining us here to break down NXP earnings that have just dropped this afternoon. And we'll see what more the company has to say when they address-- address analysts on their earnings call. Will, we appreciate the time. Thanks so much for breaking this down with us.