NXP Semiconductors: Priced Right For Growth Recovery (NASDAQ:NXPI)

In our previous analysis, we determined that NXP Semiconductors N.V. (NASDAQ:NXPI) places significant emphasis on the automotive sector through collaborative ventures. Although the company’s primary focus in product development lies in Industrial & IoT, we discerned a well-defined strategy for the automotive domain, with a particular emphasis on ADAS and EV technologies. Anticipating the continued prioritization of these areas, we point to the expanding Autonomous Vehicle (AV) and Electric Vehicle (EV) market. Furthermore, we envisage that NXP’s integrated radar solution, featuring a 28nm solution to fortify its market position putting it in close competition with Infineon (OTCQX:IFNNF).

In this analysis, we covered the company as its full-year growth for 2023 is projected to be flattish based on analyst consensus and below our previous growth projections of 9%, indicating a slowdown in growth compared to 2022 where it grew robustly by 19%. We analyzed the company’s earnings briefings and highlighted possible factors that could be attributable to its slowdown. Moreover, we examined and derived a revenue breakdown of the company and its performance in 2022 to recognize its key products and performance. Furthermore, we evaluated its product developments and partnerships to establish whether it could maintain a growth recovery beyond 2023.

Growth Slow Down Not Primarily Due to External Factors

Click to enlarge

Source: Company Data, Khaveen Investments

As seen above, the company’s revenue growth based on TTM had slowed down sharply compared to the previous year. We examined the company’s quarterly earnings transcripts in Q1 to Q3 2023 to compile factors highlighted by management for the slowdown. We identified several macroeconomic reasons highlighted by management including China demand slowdown and geopolitics, inflation and supply chain constraints in the industry.

China Demand Slowdown

According to management, weakness in China was highlighted and there had been “mixed trends” in the Chinese market with an expectation of a gradual and steady recovery with a cautiously positive outlook. We examined its competitors whether there had been a slowdown in growth in China. For STMicro, we referred to its Asia Pacific breakdown as it did not disclose its China revenues.

Click to enlarge

Source: Company Data, Khaveen Investments

Based on the table, only NXP and TI have experienced a contraction in revenue in China for YTD 2023. On the other hand, STMicro had positive growth in its Asia Pacific revenues and Infineon as well in China. While ADI (ADI) did not disclose its geographic revenue breakdown by quarter, it previously highlighted that it “strategically undershipped Asia, especially China, due to weaker demand trends”. Additionally, in terms of geopolitics, while the US had imposed restrictions on exports of equipment to China, it had approved foreign firms such as TSMC (TSM), SK Hynix and Samsung (OTCPK:SSNLF) to continue procuring equipment for expansion in China. Therefore, we do not believe the growth slowdown of the company is primarily attributed to the slowdown in China.

Inflation

NXP also highlighted inflation as a factor for a subdued macroeconomic environment. However. according to the IMF, global inflation is projected to reject from 8.7% in 2022 to 6.9% in 2023 and encourage reject to 5.8% in 2024. Thus, we believe that it is not a primary factor for its growth slowdown.

Supply Chain

In Q1 2023, the company’s management highlighted that there were supply chain constraints with shortages in automotive and industrial segments affecting its growth. However, the company expected the situation to standardize in the second half of the year. Additionally, in Q3 2023, the company highlighted that the supply chain constraints had normalized. Thus, we believe that it is not a primary factor for its growth slowdown.

There was this complete supply crisis over a very extended period of time, which would totally drain supply chain, which has now normalized. – Kurt Sievers, President and Chief Executive Officer

All in all, we believe that the company’s slowdown is not fully explained by external factors despite the company experiencing a slowdown in China as not all competitors had a slowdown in China such as Infineon and STM (Asia Pacific), as well as not due to inflation which is on a declining trend and supply chain constraints which had already normalized according to the company. Therefore, we believe there could be internal factors affecting its growth slowdown which we scrutinize encourage in the next point.

NXP Losing Affected by MCU Market Slowdown and Competitiveness

To establish whether NXP’s growth slowdown could be due to internal factors, we first compared its 2023 YTD Q3 revenue performance with its top competitors below.

Click to enlarge

Source: Company Data, Khaveen Investments

As seen, NXP is one of the only companies besides TI which had negative growth in 2023 Q3 YTD while all other competitors in the table had strong growth in 2023. Only TI had lower growth than NXP in 2023. Based on TI’s latest earnings briefing, management highlighted weakness in its Industrial and Communications segments (47% of revenue). On the other hand, Infineon and STMicro had strong double-digit growth in 2023. While Infineon made several acquisitions (3db Access, Imagimob, GaN Systems), these companies have an estimated revenue of only $68 mln (0.6% of Infineon’s revenue), thus indicating its strong performance driven by organic growth.

Furthermore, we compiled NXP’s revenue breakdown by end markets below through Q3 YTD 2023.

Click to enlarge

Source: Company Data, Khaveen Investments

Based on the table, the company’s largest end market, Automotive (57% of revenue) continued to outperform its total growth followed by Communication Infrastructure & Other whereas its Industrial & IoT and Mobile end markets had large declines. While the company’s Automotive segment had positive growth, it had underperformed compared to competitors such as Infineon (32.7% growth), ADI (22.4%) and STMicro (35.4%). Moreover, the company also underperformed in the Industrials end market to Infineon (30%) and ADI (14.8%). Thus, this could imply that NXP is losing competitiveness or having exposure to low growth or weak products.

We compiled and derived the company’s revenue breakdown by product group based on various sources such as its earnings briefing and research reports from Omdia and Yole Development. For Security ICs, Power ICs, RF Power and automotive sensors, we estimated its 2022 revenues based on the market forecast CAGR.

Click to enlarge

*2022 growth estimated based on market forecast CAGR

Source: Company Data, Research Reports, Khaveen Investments

As seen, we calculated the company’s largest product group to be MCUs at 33.8% of its total revenue in 2022. Additionally, the company’s MCUs are featured in all end markets including Automotive, Mobile, Industrial & IoT and Communication Infrastructure & Other. Its revenue growth in 2022 was strong at 17.9% as it was mainly supported by the surge in the overall MCU market growth of 25% as “supply chain imbalances dissipated”. However, the market is forecasted by Yole Development to contract to $22.9 bln (-3.8%) in 2023 as oversupply issues arose and has a forward forecast CAGR of 5.3%, which is lower than the 2022 market growth. We derived a weighted average forecast CAGR of 8.5% based on the market CAGR and NXP’s product weights, which is above analyst consensus’ 3-year estimates at an average of 3.2%.

Furthermore, in terms of market share, NXP’s market share had declined by 1% over the past 4 years to 16.6%, though still tied with Renesas for first place in 2022. In our previous analysis of Renesas, we analyzed NXP’s overall MCU product portfolio in comparison with the other top 5 competitors and determined its product performance and product breadth disadvantage against competitors.

Outlook

Click to enlarge

Source: Company Data, Research Reports, Khaveen Investments

Overall, we believe that the company’s revenue slowdown in 2023 is mainly contributed by its exposure to MCUs which is its largest product group which we compute represents 33.8% of its total revenues. This is as the MCU market is forecasted to contract in 2023 by 3.8% following a surge in the prior year of 25% which boosted NXP’s growth in 2022. Furthermore, we believe NXP’s disadvantages in terms of MCU product performance and breadth also contributed to its market share losses which we believe could continue to be a disadvantage to the company and forecasted its MCU share to reject based on its 3-year average of 0.33% per year in market share losses. Overall, we forecasted its total growth to slow to 2.6% for the full year but rebound in 2024 and beyond at above 8%, in line with management’s long-term target of between 8 to 12% growth as highlighted in its investor presentation.

Product Developments and Partnerships maintain Positive Outlook

We encourage scrutinize whether NXP’s growth rate could recover beyond 2023 by compiling its latest product developments and partnerships in 2023 by segment and product by segment and product group.

Click to enlarge

Source: Company Data, Research Reports, Khaveen Investments

Based on the chart, the company’s partnerships and product developments are focused predominantly on its Automotive end market which is consistent with our previous analysis where we found the company focusing on Automotive in ADAS and EV. From the table, we compiled its product development and partnerships by product group to differentiate with its revenue breakdown and market growth forecast. For MCUs, its largest product group by revenue, the company announced an expanded portfolio of new MCU products which could improve its product breadth as well as a partnership with TSMC to unveil automotive embedded MRAM memory with its MCUs.

Though, while MCU is its largest product group, its Automotive Radar Solutions has the most product developments and partnerships. For example, the company expanded its S32 platform “optimized for efficiency improvement” of various vehicle applications such as EVs. Additionally, the company entered into partnerships with EV automakers such as VinFast (VFS) and NIO (NIO) as well as software companies such as VicOne and Elektrobit for software-defined vehicles. We believe this indicates the company is trying to focus on the high-growth automotive radar market which has the highest forecast CAGR among its product group at 23.8%. Following that, the Electrification (BMS) product group has the second-highest growth forecast.

Outlook

All in all, we believe that besides its focus on the automotive segment with product developments and partners, the company also focuses on product groups that have high market growth opportunities such as radar solutions which has the highest market forecast CAGR of 23.8%, followed by Electrification (BMS) at 14%. Therefore, we see the company’s focus on automotive radar supporting its growth beyond 2023, that said, we calculate it still only accounts for 7% of its total revenues. Overall, we see its product developments and partnerships supporting our expectations of a growth recovery in 2024 but at the low end of management’s target of between 8% to 12%.

Risk: Automotive Competition

Click to enlarge

Source: Strategy Analytics, Khaveen Investments

We believe the risk to the company is competition within the automotive semicon market. Although NXP trails behind Infineon at second place, its share has declined slightly in 2022 while TI and STMicro gained share. As mentioned, its competitors outperformed NXP in 2023 based on their automotive growth.

Verdict

In summary, we observed a slowdown in our company’s revenue growth for 2023. We credit this deceleration primarily to the contraction of the MCU market, which saw a reject of 3.8% during the year. We calculated this market represents its largest product group, constituting 34% of total revenues. Additionally, we see its diminishing market share in the MCU market impeding its growth, as we previously identified a disadvantage in product performance and breadth compared to competitors.

Despite these challenges, we expect a growth recovery in 2024 and beyond, driven by recent product developments and partnerships. These initiatives specifically target high-growth automotive segments such as radar and BMS. However, these efforts still contribute to a relatively minor portion of our revenues. We have adjusted our projections, forecasting a growth rate of around 8% beyond 2023, aligning with the lower end of management’s long-term growth target.

Taking into account our updated DCF valuation, incorporating a terminal value based on the 5-year average EV/EBITDA of 14.04x, we derived a price target of $237.21. This indicates a limited upside of only 7%, considering that our stock has already risen by 25% since our last coverage. Consequently, we assign a Hold rating to the company.