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Is Cypress Semiconductor a Good Buy Going Into Q3 Earnings?

Investors will be eagerly looking forward to Cypress Semiconductor's (NASDAQ: CY) upcoming fiscal third-quarter results on Oct. 26, hoping that the chipmaker will be able to extend its terrific run on the stock market. Cypress shares have rocketed almost 40% this year, and they currently trade close to 52-week highs on the back of a potential design win in Apple's latest iPhone.

Not surprisingly, Cypress will be expected to deliver a robust third-quarter performance and a sunny outlook. But will the semiconductor specialist be able to live up to Wall Street expectations? Let's find out.

Image source: Getty Images.

The expectations

Wall Street expects Cypress to earn $0.23 per share on revenue of $602.4 million for the third quarter. These projections are well above the prior-year period's earnings of $0.15 per share and revenue of $530 million, and in line with the company's own expectations.

But it won't be surprising if the company manages to trump expectations this time, as 90% of its potential third-quarter revenue was already booked just one month into the quarter. In fact, Cypress had a strong book-to-bill ratio of 1.2 going into the third quarter, indicating that it was seeing strong demand patterns thanks to a surge in USB-C orders.

Cypress attributes its strong guidance to a ramp-up in USB-C demand during the second half of the year across both smartphones and PC devices. Now, Apple could be one of the key drivers of Cypress' USB-C business, as the latest generation iPhones come equipped with fast-charging capabilities.

It is likely that Apple has tapped Cypress for fast-charging the new iPhones, as the latter already supplies the chip to enable this technology in the iPad Pro. In fact, a teardown of the new iPhone reveals the presence of the CYPD2104 chip from Cypress, so it is safe to say that the chipmaker could win big from the new device.

Cypress was not a major supplier to the previous-generation iPhone, which will result in a favorable year-over-year revenue comparison despite a slower production ramp-up of the new devices this year. Therefore, Cypress looks set to top expectations this time and could also issue strong guidance.

The way ahead looks rosy

USB-C adoption will continue being a catalyst for Cypress, as its solution has been designed into 75 PC models that will go into production by the end of 2017. Apple, furthermore, is expected to ramp up iPhone X production from an expected 20 million units during the quarter ending in December to 50 million units during the first quarter of 2018, which is good news for Cypress.

What's more important to note is that USB-C is more than just a short-term catalyst for Cypress. The company holds 35% market share in this fast-growing space that's expected to clock an 89% compound annual growth rate through 2021. But there's more to Cypress than just the USB-C opportunity, as the company's automotive business has started gaining traction of late.

During the second quarter, Cypress' automotive revenue showed a massive year-over-year jump of 23% thanks to the several design wins at various automakers. The company looks well placed to maintain this impressive pace of growth, as the top eight automakers globally have now approved its chips.

More specifically, Cypress is looking to power fast-growing automotive trends such as advanced driver assistance systems (ADAS), infotainment systems, and other connected-car systems. The good news is that the company has already scored notable wins in the form of Audi's latest A8 sedan that deploys Cypress' connectivity platform for powering in-car entertainment and internet hot-spot functionality.

Such marquee design wins will enhance Cypress' visibility in the automotive semiconductor market, which could be worth $102 billion in 2022, according to Mordor Intelligence. More importantly, applications such as ADAS will play an important role in driving automotive semiconductor sales. One estimate suggests that ADAS component shipments will rise from just 218 million units last year to 1.2 billion units in 2025, so Cypress' relationships with top automotive component suppliers will help it tap into this huge market.

In all, Cypress Semiconductor's future looks sorted both in the short and in the long run. So investors should continue holding Cypress, as a strong earnings report next week will give the stock price a nice shot in the arm.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Cypress Semiconductor. The Motley Fool has a disclosure policy.