More than midway through 2023, sales of semiconductors are still stuck in a rut, banished there largely due to the terrible PC and smartphone sales trends that started in 2022. Many analysts, myself included, worried that chips for the auto industry would suffer a similar fate at some point this year.
No such thing has happened, though. In fact, even as the auto industry works through growing pains as it transitions to more electric vehicle (EV) production, automotive chips are still in overdrive. One of the top names in the business, NXP Semiconductors (NXPI -0.59%), posted soaring auto revenue in its latest quarter. Here's what investors need to know.
The auto industry is providing the bailout
During the great recession of 2007 and 2008, the auto industry was in dire need of an economic bailout. These days, it's the auto industry providing something of a lifeline. NXP's second-quarter 2023 earnings provide the context.
The company reported sales of $3.3 billion, essentially flat from the same period in 2022. However, sales to automakers -- which accounted for 57% of NXP's total revenue -- increased 9% year over year to $1.9 billion. That offset the ugliness from the company's industrial and Internet of Things (IoT) segment (down 19% year over year) and mobile (down 27%).
What's happening? The modern vehicle is being transformed into a data center on wheels, quite literally. Sure, electrification is a big trend that NXP is a part of, but it's also steady increases in advanced driver-assist systems (ADAS) on the way to self-driving cars, in-cabin digital experiences, and mobile connectivity.
In other words, lots more chips are needed for every car rolling through an assembly line, providing big boosts to companies like NXP. Just four years ago, automakers were less than half of NXP's total revenue, with quarterly sales to cars just barely crossing the $1 billion-per-quarter mark.
Meanwhile, industrial and wireless chip markets (including smartphones and other consumer electronics) are still dealing with excess inventory that got built up during the pandemic boom and then bust of 2022. Thus it's the automotive industry that's providing a boost for NXP at exactly the right time.
Better days ahead for everyone
But what about IoT and mobile? Without those areas returning to growth, not even automotive chips seem to be enough to lift NXP materially higher. As ugly as the numbers were, though, there was some good news.
Industrial and IoT revenue increased 15% in Q2 over the previous quarter, and mobile increased 9%. Management explained on the earnings call that while both segments will be down year over year in the third quarter, they should again be up sequentially. It appears that the beginning of 2023 was the bottom of the rut, so NXP should be back in all-out growth mode by 2024 -- assuming secular growth trends continue for the auto market.
NXP has pulled in $13.2 billion in sales over the last 12-month period, but it's still anticipating about $15 billion in sales for 2024.
Time to buy?
NXP isn't going to be the fastest-growing chip stock around, but that's OK. For investors looking for a slower-but-steadier name in the industry, though, there's a lot to like about this one. The company pays a rising dividend (currently yielding about 1.8% on an annualized basis) and repurchases stock with excess cash.
Data by YCharts.
NXP Semiconductors is currently valued at just 21 times trailing-12-month earnings, but under 15 times based on Wall Street analysts' predictions for 2024 earnings. If NXP can deliver on its goals through the end of next year, the stock looks like a reasonable (though not particularly cheap) value.
Nevertheless, the transformation of the modern automobile will be a multiyear process that should continue to benefit NXP for years to come. If gradual growth and dividend income is what you're after, put this chip stock on your watch list.
