Seth Sherwood: We recently launched coverage of Dutch semiconductor giant, NXP Semiconductors, with a $115 fair value estimate. The firm is the largest supplier of semiconductors for the automotive market and a significant force within the analog and microcomponents markets generally. We believe the firm has a durable position within the automotive, industrial, and communications infrastructure markets due to a combination of customer switching costs and intangible assets. The strength of these competitive advantages gives us confidence that the firm will generate excess returns over the next decade and thus warrants a Narrow Economic Moat Rating. While we expect 2019 may be a bumpy ride for the firm as it negotiates broad macroeconomic uncertainty, in the long term, NXP is likely to be a major beneficiary of the major secular growth trends in the broader industrial market: connectivity, efficiency, and safety.
In our view, the firm’s technologies for RF power and embedded processors should allow it to capture major tailwinds from 5G and the Internet of Things. Similarly, analog and microcontroller products in the automotive and industrial markets should enable NXP to benefit from the broad proliferation of electronic content in both markets. Finally, we expect the firm’s portfolio of RADAR and battery management products will allow it to grow with the rise of autonomous driving and the move to hybrids and EVs. NXP derives a plurality of its sales from the cyclical automotive market, but we believe the significant content growth within these markets (between infotainment systems, active safety, electrification, and connectivity) should help insulate it from the worst of the cyclical downturns.