The past six months haven’t been great for NXP Semiconductors. It just made a new 52-week low of $188.11, and shareholders have lost 20.1% of their capital. This may have investors wondering how to approach the situation.
Is now the time to buy NXP Semiconductors, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons why there are better opportunities than NXPI and a stock we'd rather own.
Why Is NXP Semiconductors Not Exciting?
Spun off from Dutch electronics giant Philips in 2006, NXP Semiconductors (NASDAQ: NXPI) is a designer and manufacturer of chips used in autos, industrial manufacturing, mobile devices, and communications infrastructure.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, NXP Semiconductors’s 7.3% annualized revenue growth over the last five years was mediocre. This was below our standard for the semiconductor sector. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect NXP Semiconductors’s revenue to drop by 4.8%, a decrease from its 2.3% annualized declines for the past two years. This projection doesn't excite us and implies its products and services will face some demand challenges.
3. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, NXP Semiconductors’s margin dropped by 8 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. NXP Semiconductors’s free cash flow margin for the trailing 12 months was 16.3%.
Final Judgment
NXP Semiconductors isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 14.7× forward price-to-earnings (or $188.11 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at one of our top software and edge computing picks.
Stocks We Like More Than NXP Semiconductors
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