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2 Reasons Why Cypress Semiconductor Is Still a Good Bet

Cypress Semiconductor (NASDAQ: CY) showed once again why it is one of the hottest-performing semiconductor names on the stock market with an impressive third-quarter report in late October. The semiconductor specialist bested Wall Street expectations thanks to its strategy of targeting fast-growing markets such as the Internet of Things, gaming consoles, and automotive chips.

The icing on the cake for Cypress was robust fourth-quarter guidance. Not surprisingly, investors cheered the company's performance and the shares soared to five-year highs. But the good news is that Cypress isn't done growing yet as it has a strong set of catalysts.

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Automotive growth is just getting started

Cypress' automotive business has grown 17% so far this fiscal year on the back of content gains. The company has struck partnerships with big name carmakers and automotive component suppliers that include Audi, Toyota, Continental AG, Bosch, and Denso.

In fact, the company claims that the top eight automotive OEMs (original equipment manufacturers) are developing cars and components using Cypress' wireless connectivity solutions. These customers are now deploying more Cypress chips in their cars and components, bumping up the company's automotive business.

Cypress' automotive partnerships should pave the way for it to tap the growth opportunity present in this space. According to Gartner and Cypress' own internal estimates, the semiconductor content in each car can range from $300 to $1,000, driven by various applications such as infotainment systems, body electronics, and advanced driver assistance systems (ADAS).

The ADAS market is expected to clock annual growth of almost 20% until 2021. Cypress doesn't want to miss this gravy train, so it has found a way to tap this market while bypassing competition from heavyweights such as NVIDIA, Intel, NXP Semiconductors, and other component makers.

Instead of developing its own system-on-a-chip (SoC) platform and going head-to-head against NVIDIA's DRIVE PX platform, Cypress is supplying specialized NOR flash memory chips. These memory chips are used by component suppliers and SoC makers in their ADAS platforms. Bosch, for instance, has been using Cypress' NOR flash memory to develop its next-generation ADAS system, while Denso is deploying the same in the 2017 model year Toyota Camry.

In fact, Cypress' memory chips are used by half of the ADAS systems. This is great news for Cypress investors as NOR flash usage in ADAS applications is estimated to grow at 28% a year through 2021. Therefore, Cypress' automotive business can keep getting bigger as the company is following a smart strategy by partnering with the big players in this space.

The consumer business will be a big catalyst

Cypress' consumer business is its biggest source of revenue, supplying 35% of the top line. This business has been in fine form this year as the company's chips have been placed inside a variety of consumer devices ranging from Apple's new iPhones to Fitbit's Ionic smartwatch and Nintendo's Switch console. In fact, Cypress claims that its consumer business is on track to deliver annual revenue growth of 35% to 40% this year.

Cypress is on track to log such terrific growth by supplying Wi-Fi and Bluetooth connectivity modules to consumer electronics devices such as smartwatches and video game consoles, as well as supplying USB-C type fast-charging modules for the new iPhone. The good news for investors is that the applications of both these type of chips is set to grow remarkably.

The company's Wi-Fi and Bluetooth combo offerings will help it tap the booming growth in the Internet of Things space. Cypress is squarely aiming at the machine-to-machine connectivity market with its Wi-Fi and Bluetooth combo chips. Wi-Fi helps devices connect to the Internet, while Bluetooth allows devices to communicate with each other.

Cypress is using the combination of the two technologies to power smart-home systems and other consumer devices as mentioned above. For instance, its wireless chips are enabling smart-lighting platforms such as LEDVANCE, which uses Apple's HomeKit smart-home framework.

More importantly, Cypress has rolled out a new development platform that will allow product developers to create products based on Apple HomeKit. This could be a big deal for the chipmaker as Cupertino's smart-home platform is expected to gain a lot of traction thanks to the widespread deployment of Siri across 700 million devices, which could help Apple bring more users into its ecosystem, eventually helping Cypress sell more chips.

Meanwhile, Cypress is the pioneer in USB-C technology, which is being adopted at a rapid pace because of its many benefits such as fast data transfer, fast charging, and compact design. More specifically, Cypress holds 35% market share in this space, which means that it can significantly boost its revenue as USB-C adoption is expected to increase at a compound annual growth rate of 89% over the next four years.

Is it still a good buy?

Even though Cypress shares are trading at multiyear highs, investors can still consider buying more shares thanks to a cheap valuation and the potential of rapid earnings growth. Cypress stock has a price-to-sales (P/S) ratio of 2.4, which is significantly lower than the semiconductor industry average of 4.5. This means that new investors won't have to pay a lot to buy into this growth story.

What makes Cypress even more enticing is that it has delivered average annual revenue growth of 38% over the past three years, better than the industry average of just 8%. Therefore, Cypress shares continue to remain cheap even after clocking such terrific growth. Finally, analysts expect the company's bottom line to increase at over 45% annually for the next five years, making Cypress look like a value play at its current valuation.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple, Fitbit, and Nvidia. 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, Intel, and NXP Semiconductors. The Motley Fool has a disclosure policy.