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Morningstar | NXP Stands to Gain From Broad Secular Growth; Initiating With $115 FVE, Narrow Moat Rating

NXP Semiconductors is the largest supplier of semiconductors for the automotive market and a significant force within the analog and microcomponents markets generally. We believe the firm has a durable position within the automotive, industrial, and communications infrastructure markets due to a combination of switching costs and intangible assets. The strength of these competitive advantages gives us confidence that the firm will generate excess returns over the cost of capital over the next decade and thus warrants a narrow economic moat rating. While we expect 2019 may be a bumpy ride for the firm as it negotiates broad macroeconomic uncertainty, in the long term, NXP is likely to be a major beneficiary of the secular growth trends in the broader industrial market. We are launching coverage of the Dutch semiconductor giant with a fair value estimate of $115 per share and note that shares are currently trading in 4-star territory.

In our view, the firm’s technologies for RF power and embedded processors should allow it to capture major tailwinds from 5G and the Internet of Things. Similarly, analog and microcontroller products in the automotive and industrial markets should enable NXP to benefit from the broad proliferation of electronic content in both markets. Finally, we expect the firm’s portfolio of RADAR and battery management products will allow it to benefit from the rise of autonomous driving and the move to hybrids and EVs. While NXP derives a plurality of its sales from the cyclical automotive market, we believe the significant content growth within this market (between infotainment, active safety, electrification, and connectivity) should help insulate it from the worst of the cyclical downturns.

NXP significantly grew its position within the automotive market through its acquisition of Freescale Semiconductors in 2015. It also focused its firm on less commoditylike opportunities after selling its Standard Products division in 2017.

However, despite the changes, NXP remains in a highly competitive market. The firm squares off against a variety of well-established players, such as Texas Instruments and Microchip Technologies, and we expect pressure to capture new greenfield opportunities will require the firm to maintain its high level of investment, limiting sustained margin expansion.