While there has been a ton of hand-wringing over the big decline in personal computer sales and how it affects the semiconductor industry, one of the quieter areas of growth for the sector has been the use of chips in the automotive industry. In fact, according to Merrill Lynch, the automotive semiconductor market is a stunning $30 billion, and four companies dominate sales.
With the automotive chip market growing at a secular 6.5% annual pace between 2010 and 2015, the average semi content in cars has jumped from $300 to over $340. The chips are used for everything from infotainment to safety and power efficiency. In the future, the Merrill Lynch team says that advanced drive assist systems will lead the way toward at least semi-autonomous driving with chips helping with camera, processing, computing and sensor systems.
Four top companies dominate the market share for automotive semiconductors
NXP Semiconductors
This is considered a top play for investors looking for a chip stock with Internet of Things exposure, and it is still down a stunning 25% from highs printed in June of 2015. The NXP Semiconductors N.V. (NASDAQ: NXPI) merger with Freescale Semiconductor was widely applauded on Wall Street, and many analysts believe the merger is transforming the company into a powerhouse. It made NXP the fourth largest semiconductor company in the industry.
It is also important to note that the combined company is the number one supplier in auto semiconductors with a 14% share, as well as the number one supplier in global microcontrollers and a dominant supplier in mobile payments.
NXP is getting its chips into high-growth areas such as contactless mobile payments, the Internet of Things, mobile-phone charging, increased cellular data consumption and LED lighting. With its shares trading at a massive 40% discount to its peers, analysts are very positive on the faster earnings growth potential relative to the competition.
The Merrill Lynch price target for the stock is $105, and the Thomson/First Call consensus target is $104.28. The stock closed Wednesday at $85.05.
Infinera
Some feel that this top company would be an outstanding addition to a networking giant as a takeover candidate. Infinera Corp. (NASDAQ: INFN) provides Intelligent Transport Networks, enabling carriers, cloud operators, governments and enterprises to scale network bandwidth, accelerate service innovation and simplify optical network operations. The company also has a 9% share of the automotive chip market.
Infinera’s end-to-end packet-optical portfolio is designed for long-haul, subsea, data center interconnect and metro applications. Infinera’s unique large-scale photonic integrated circuits enable innovative optical networking solutions for the most demanding networks.
Alphabet recent announcement that it will be adding 12 new data center regions, which is a definite positive for Infinera. Trading at just 13.6 times EV/EBITDA with gross margins set at 46% and EBIT margin at 8%, the stock is cheap at current levels.
The analysts’ consensus price objective for Infinera is at $22.21. Shares closed most recently at $15.45.
STMicroelectronics
This stock has been mauled over the past year and could provide aggressive investors an interesting trade. STMicroelectronics N.V. (NYSE: STM) designs, develops, manufactures and markets semiconductor products and subsystems and modules worldwide. The company offers a range of products, including discrete and standard commodity components, application-specific integrated circuits, full-custom devices and semi-custom devices, and application-specific standard products for analog, digital and mixed-signal applications, as well as silicon chips and smartcards.
The company also provides subsystems and modules, including mobile phone accessories, battery chargers and ISDN power supplies for the telecommunications, automotive and industrial markets, as well as in-vehicle equipment for electronic toll payment. Merrill Lynch points out that the company has a 7% share of the auto chip market.
Shareholders in STMicroelectronics are paid a large 6.03% dividend. The stock is rated Neutral at Merrill Lynch with a $6.80 price target. The consensus price objective is $6.96. The shares closed most recently at $5.66.
Texas Instruments
This is an old-school chip tech company that is also a sizable auto chip player. Texas Instruments Inc. (NASDAQ: TXN) is a global semiconductor design and manufacturing company that develops analog integrated circuits and embedded processors. The company generates 80% to 90% of its revenues from its analog and embedded processing businesses, which have well-diversified end-markets (autos, industrial, personal/consumer electronics), long product life cycles and limited capital intensity. The company has 6% market share of the auto chip market.
Numerous Wall Street pros see the stock as core large cap holding, and they cite a solid high-single-digit and very diverse revenue flow, solid capital allocation to lever the balance sheet if needed, and substantial room for margin expansion as the ramp up new facilities. The company boasts sustained impressive cash flow over the past several years and has impressively returned 100% plus of that back to shareholders via stock buybacks and dividends.
Given modest capital expenditure requirements coupled with room for margin expansion, Texas Instruments should be able to sustain double-digit free cash flow growth despite slower sales growth.
Texas Instrument investors receive a 2.6% dividend. The stock is rated Neutral at Merrill Lynch with a price objective of $60, and the consensus target is at $57.40. The stock closed Wednesday at $59.17.
Clearly the auto chip market is growing fast. The advent of the self-driving car could be huge for sector, and all of these companies are potential players in that arena.
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