Why does NXP have broad prospects in the automotive industry?

When NXP Semiconductors (NXPI) announced its quarterly results, they gave investors a thorough understanding of the automotive and chip industries. Given the impact of the epidemic on the supply chain and demand, investors will listen to their views on the negative impact of the automotive industry. Therefore, NXP stated that when China's demand for high-tech cars began to rebound, it inadvertently predicted the rebound of Nio.

Since the Luckin Coffee (LK) incident deepened distrust of Chinese companies. Why do investors care about Nio? If COVID-19 put pressure on sales last quarter, what is the near-term outlook for NXP?

Started to rebound in China

The United States used to provide investors with leading indicators of a rebound in demand. This was reversed after COVID-19. China has imposed the strictest blockade in Wuhan. After 60 days, China reopened and major cities not severely affected by the epidemic, such as Shanghai and Beijing, also reopened. NXP said on the conference call that "China's industrial and mobile terminal market demand environment has improved significantly." This view shows that smartphone suppliers like Qualcomm will rebound earlier than other companies.

Regarding China’s electric vehicle sector, NXP said: “As far as I know, China has updated some policies similar to pure electric vehicles (similar to the US cash-for-cash program in 2009), and these policies seem to be working.” So very Obviously, not only China’s car sales and production are on the rise, but the trend of electric vehicles looks pretty good in China.

Nio achieved a growth of 180.7% in April, which should not surprise investors. Nio's stock price rose nearly 47% last month.

NXP's short-term resistance

In the first quarter of this year, due to the outbreak of the epidemic, NXP's revenue decreased by nearly $200 million. Total revenue was 42.02 billion euros, a decrease of 3% year-on-year. NXP's net debt at the end of the quarter was $6.29 billion. In order to retain cash, it will suspend repurchase. In this way, it may double the 12-month adjusted EBITDA ratio.

NXP maintains regular dividends.

Revenue from the automotive industry fell by 27% consecutively. The industrial, Internet of Things, and communications industries achieved 6% and 5% growth respectively. NXP has a good grasp of when the auto industry will recover. Through the OEM and distribution partners, it will monitor the revised demand signal and adjust the delivery level accordingly. For investors, NXP stock is a good variety of car rebound.

In fact, consumers may temporarily avoid public transportation. They may buy a new car, such as Ford, General Motors. As car companies invest a lot of money in technical content, they will actively provide incentives to customers. When this happens, NXP's automotive business revenue will recover faster than other businesses.

Growth opportunity

NXP maintains its forecast of a compound annual growth rate of 5-7% in 2021E. As shown in the bar chart below, automobiles account for a large part of revenue:

Industry and the Internet of Things will grow at the fastest rate, but automobiles accounted for 48% of NXP's 2018 revenue:

In the automotive industry, new businesses in ADAS/radar, electrification and car networking will drive its growth. Once the car factory reopens, its core businesses in power systems, secure car access and connected infotainment will resume.

In the mobile field, mobile payments will continue to surge. Strong quarterly earnings have boosted Square (SQ) and PayPal (PYPL). With the increase of mobile payment users, NXP's mobile department will grow at a rate of 4-6% per year. The epidemic will require more electronic payment processing, and the use of physical currency as a means of transaction will further shrink.

In the field of communications, the deployment of 5G base stations will enable the department's revenue growth rate to be between 0-2%.

Assume that NXP’s revenue will not grow more than 5% per year for the next ten years. Pricing with a 15% decline in revenue this year, and using the following indicators. This shows that NXP's stock value is around $121.

Although due to the epidemic, NXP's stock price has fallen by 19% in 2020. But this pandemic will eventually pass, and NXP’s business will signal a rebound to investors.