NXP Semiconductors has been treading water for the past six months, holding steady at $211.
Is now the time to buy NXP Semiconductors, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is NXP Semiconductors Not Exciting?
We're cautious about NXP Semiconductors. Here are three reasons why you should be careful with NXPI and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, NXP Semiconductors grew its sales at a mediocre 7% compounded annual growth rate. This fell short of our benchmark for the semiconductor sector. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect NXP Semiconductors’s revenue to drop by 1.6%. Although this projection is better than its two-year trend, it’s tough to feel optimistic about a company facing demand difficulties.
3. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, NXP Semiconductors’s margin dropped by 10.1 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. NXP Semiconductors’s free cash flow margin for the trailing 12 months was 15.1%.
Final Judgment
NXP Semiconductors isn’t a terrible business, but it doesn’t pass our bar. That said, the stock currently trades at 17.3× forward P/E (or $211 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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