Why NXP semiconductors soared higher today, bucking the chip sector trend

What happened

On a bad day for the broader semiconductor space, NXP Semiconductors (NXPI 4.04%) it was up 6.5% at 2:07 p.m. ET on Thursday. There wasn’t much news about the company, but a major tech publication reported that the Korean tech conglomerate Samsung is interested in buying it.

And that

the Asian Tech Press reported Thursday that Samsung is looking to acquire NXP specifically. While the article also cited other European chipmakers such as Infineon (IFNNF 2.21%) and ARM Holdings as potential targets, NXP appears to be at the top of the list.

The acquisition thesis is twofold. First, Samsung seems to recognize the appeal of chipmakers serving the auto industry. Semiconductor content per vehicle only increases with each new model year as automakers add more autonomous driving and driver assistance features, and as more electric vehicles are sold. Last year, NXP received 50% of its revenue from the automotive sector and another 22% from the industrial and Internet of Things sector, which is also increasing the chip content in its products. Overall, NXP forecasts that these markets will grow between 9% and 14% annually for the next three years, an attractive growth rate compared to what is expected for the semiconductor industry and the broader economy.

Second, NXP is a major customer of Taiwan Semiconductor Manufacturing (MST -2.80%), and Samsung is competing with TSM in the foundry business. Foundries make chips for other companies that outsource their manufacturing, and it’s becoming an even more attractive business amid the semiconductor boom. If Samsung were to acquire NXP, it could also bring NXP’s manufacturing in-house, effectively stealing business from its rival.

Now what

Even after Thursday’s outburst, NXP is only trading around 13.7 times this year’s earnings estimates. One would think that NXP could have shot higher, given that any acquisition premium on offer would no doubt be higher than that.

However, investors may have doubts about the viability of such a deal. After all, five years ago, Qualcomm (NASDAQ:QCOM) tried to buy NXP, but the Chinese authorities did not approve, so the plan was abandoned. I’m not sure what would lead to a different result this time, especially as China is trying to strengthen its position in the crucial market for semiconductors.

The rumor mill may be benefiting NXP shareholders now, but they probably shouldn’t count on a deal actually happening. It is probably best to focus NXP’s investment thesis on its fundamentals as an independent company.

Leave a Comment