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Morningstar | Cypress’ MCU, Auto Exposure Looks Appealing to Infineon

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 expect that automotive content increases in particular will lead to solid top-line gains. We are optimistic of its revenue opportunity, but we note that Cypress competes with semiconductor titans that have prevented it from establishing a moat. 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 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 and 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 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 key markets. Cypress further increased its strength in consumer and industrial Internet of Things with the purchase of Broadcom’s Internet of Things unit in 2016. In June 2019, Infineon Technologies announced an agreement to purchase Cypress Semiconductor for $10 billion, which management expects to close in early 2020. The ongoing geopolitical uncertainty between the U.S., its allies, and China remains a concern, but we believe the acquisition is likely to be completed.