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Morningstar | Cypress Is Growing Out of the Shade Cast by Semis Giants; Moat Trend to Positive; FVE Intact. See Updated Analyst Note from 18 Jan 2019

Cypress Semiconductor is a provider of advanced embedded systems used in a variety of markets including industrial Internet of Things, consumer devices, and automotive connectivity. We believe the firm has gained scale and capabilities through acquisitions and significant investment to better compete in these high growth markets, and we expect that automotive content increases in particular will lead to solid top-line gains. We are optimistic of the firm’s revenue opportunity but note that Cypress competes with semiconductor titans that have prevented it from establishing a moat. We maintain our fair value estimate of $14 per share. However, we believe the firm’s bevy of automotive products and healthy stream of design wins at the major automotive OEMs and Tier 1 suppliers are becoming increasingly more “mission critical” with infotainment sales being complemented by growing connectivity and active safety driving solutions. As these sales give rise to greater customer switching costs, we believe Cypress’ moat trend is positive.

Cypress’ embedded system contains a microcontroller along with memory to enable a variety of different simple platforms. These systems require various types of memory, including one to hold a program, such as NOR, and another to hold intermediate results during computations, like SRAM. Cypress produces and has a large share of the SRAM market and NOR markets for products in industrial automation, automotive electronics, modern appliances like coffee makers and washing machines, and digital devices such as smart home cameras and wearables.

Cypress merged with Spansion, a market leader in NOR flash, in 2015. The two companies had complementary product lines and market exposures that resulted in giving the combined firm a more secure foothold in the automotive and industrial markets. Cypress further increased its existing strength in consumer and industrial Internet of Things with the purchase of Broadcom’s Internet of Things unit in 2016.

We believe the firm is likely to rise with the fast-moving tide of increased connectivity content and Internet of Things products, but we believe Cypress has its work cut out for it in trying to fend off the likes of Qualcomm, NXP, and Intel, among others, to secure moat-worthy competitive advantages.