NXP Semiconductors (NASDAQ: NXPI) is Play on Car Production Ramp-Up

The used car market has been very strong since the onset of the pandemic. There are several reasons for this strength, but a big piece of the puzzle has been a low new vehicle inventory. Automakers were forced to temporarily shut down for a couple of months earlier this year, which forced people that were in the market for a car to opt for a used one.

Now, demand for new cars is far outpacing supply and automakers are desperately trying to play catch-up. And NXP Semiconductors NASDAQ: NXPI – which derives nearly half of its revenue from its automotive business – has been a big beneficiary.

Preliminary Q3 Results Were Better Than Expected

NXP wasn’t supposed to report its earnings until later this month, but released preliminary results last Thursday, after the bell.

The mid-points of NXP’s guidance had called for $2 billion in revenue, $950 million in gross profit, and a $47 million operating loss. The preliminary results, however, were $2.27 billion in revenue, $1.09 billion in gross profit, and an operating income of $32 million.

The market cheered the news, bidding shares up nearly 5% to all-time highs.

Big Improvement Over Q2

Q2 was a rough one for NXP; revenue was down 18% yoy to $1.82 billion. Automotive led the way down, as the $674 million of revenue in that segment was down 35% yoy and down 32% sequentially.

On the Q2 earnings call, CEO Kurt Sievers talked about his expectations for Q3 2020, saying, “Automotive is expected to be down in the low 20% range versus Q3 '19 and up about 20% versus Q2 '20.”

At the time, Sievers was expecting Q3 revenue to dip 12% yoy. But now, the preliminary results came in roughly flat vs. Q3 2019. Automotive, unsurprisingly, was one of the main drivers. Last week, Sievers said:

“We experienced material improvement in demand across all end markets, but particularly in the Automotive and Mobile end markets. Additionally, demand improved in both our direct and distribution channels. The business environment has improved at a faster than anticipated pace, driving a broad-based increase in revenue, which also enabled higher gross margin.”

NXP didn’t break down its business by segment in its preliminary report, but I’m willing to bet that Automotive will come in nearly flat yoy when the full results are released later this month.

The Street Loved the Results

NXP received a barrage of upgrades on the news. Needham led the way, raising its price target from $150 to a Wall Street high of $170. Jefferies NYSE: JEF bumped its target from $150 to $161, Piper Sandler NYSE: PIPR from $130 to $160, Barclays from $130 to $150… I could go on, but you get the point:

Wall Street loves NXP, and sees additional upside past the current low-$140s share price.

Should You Follow Wall Street’s Lead?

Yes, and here’s why:

Before, I said that automakers are playing catch-up. Well, that’s not likely to change in the near future; the new car shortage may persist into 2021.

Furthermore, NXP is no one-trick pony. The 5G opportunity that we covered earlier this year is as relevant as ever.

The Chart Looks Great Too

As stated earlier, NXP’s Friday move took shares to all-time highs. The beauty of this move, though, is that shares are not long-term extended.

Shares traded between around $114 and $132 in July, August, and September. Then, in early October, shares began to rev-up, culminating in Friday’s move. One more thing to like about Friday’s surge was the volume – it came in at more than 2x the daily average.

The Final Word

The fundamentals, technicals, and Wall Street backing all point to the same thing: another leg-up.

Q4 2020 and Q1 2021 could be even better than Q3 2020, and make a 6+ month buy-and-hold a good idea with NXP.