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NXP vs. Analog Devices: Which “Strong Buy” Semiconductor Stock Could Deliver Higher Returns in 2021?

·5 min read

This year, many automakers faced a semiconductor shortage that is expected to persist for the rest of the year. This was due to the growing demand for hybrid and electric vehicles, fueled by rising Government incentives to go green. Such vehicles require more powerful semiconductor systems to control the vehicle components.

According to an IHS Markit report, the market for automotive semiconductors is expected to be worth $67.6 billion globally by 2026, indicating a compounded annual growth rate (CAGR) of 7% between 2019 and 2026.

Using the TipRanks Stock Comparison tool, let us compare two semiconductor companies that cater to automotive markets, NXP Semiconductors and Analog Devices, and see how Wall Street analysts feel about these stocks.

NXP Semiconductors (NXPI)

NXP Semiconductors is a global semiconductor company that provides a wide array of semiconductor products including microcontrollers, application processors, communication processors, connectivity chipsets, analog and interface devices, RF power amplifiers, security controllers and sensors.

The company’s products target automotive, mobile, communication and infrastructure, as well as industrial and Internet of Things (IoT) markets.

In Q1, the company reported revenues of $2.6 billion, up 27% year-over-year with diluted earnings of $1.25 per share versus a loss of $0.08 per share in the same quarter last year.

For Q2, NXP expects to earn revenues of $2.57 billion at the midpoint of its revenue guidance, a jump of 41% year-over-year. The forecast for operating income at the midpoint of its range is $542 million.

Following the Q1 results, Mizuho Securities analyst Vijay Rakesh reiterated a Buy and raised the price target from $192 to $225 on the stock.

Rakesh said in a research note to investors, “We believe NXPI is well positioned in key growth markets as the #2 player in Semiconductor Automotive and a strong position in 5G infrastructure. We believe LVP [light vehicle production] for 2021 looks better after a significantly weaker 2020 and are in the early innings of the 5G rollout, NXPI has a number of opportunities with ADAS [Advanced Driver Assistance Solutions] content, massive MIMO [multiple-input, multiple-output], and Power Amplifiers for 5G.”

The company was plagued by chip supply constraints in the first quarter and expects this situation to continue for the remainder of this year. Rakesh noted regarding the supply constraints, saying, “NXPI is running at the high-end of its utilization with most fabs full out and sees higher capex at 7% of revenue for the year as it adds back end capacity to cope with additional demand.”

When it comes to the Automotive segment, NXP expects to ship 20% more automotive semiconductor products in the first half of the year versus the first half of 2019. NXP noted the rising level of electric vehicle (EV) production is leading to increasing penetration of its electric drivetrains.

Importantly, the automotive market made up around 47.8% of the company’s total revenues of $2.6 billion in Q1.

The mobile market made up only 13.5% of NXP’s total revenues in Q1 with revenues of $346 million. However, it expects revenues for this segment to grow in the mid-30% range year-over-year in Q2, driven by 5G ultra-wide-band (UWB) networks.

NXP has a portfolio of UWB IoT solutions including NXP Trimension SR150 and SR040. The development tools that are based on those solutions will enable new applications for iPhone and Apple Watch. (See NXP Semiconductors stock analysis on TipRanks)

Consensus among analysts on Wall Street is a Strong Buy based on 14 Buys and 4 Holds. The average analyst NXPI price target of $227.33 implies approximately 11.7% upside potential to current levels.

Analog Devices (ADI)

Analog Devices designs, manufactures and tests a broad portfolio of solutions including integrated circuits (ICs) software and subsystems. The company specializes in data conversion, signal processing, and power management technology.

The company posted revenues of $1.66 billion in Q2, which surpassed the Street’s estimates of $1.61 billion and rose 26% from the year-ago period. The increase was attributed to strength in the industrial and automotive markets.

ADI reported earnings of $1.54 per share, beating the consensus estimates of $1.45 per share and soaring 43% year-over-year.

In the fiscal third quarter, ADI expects revenues of $1.7 billion that could vary by $70 million. The company forecasts earnings per share of $1.23 that could increase or decrease by $0.11 per share.

Around five days back, Oppenheimer analyst Rick Schafer reiterated a Buy on the stock.

Similar to NXP, ADI continues to expect supply constraints to affect the company for the rest of the year. Last week, in a virtual interaction between Oppenheimer analyst Rick Schafer and ADI’s Director of Investor Relations, Mike Lucarelli, Lucarelli said that supply constraints are likely to extend into early next year.

However, ADI said at its earnings call, “Despite this backdrop, we are positioned for a strong second half as our continued capital investments are aligned with robust demand.”

The company caters to industrial, communications, automotive, and consumer markets with its products. In Q3, the company expects revenues across its business-to-business (B2B) markets to rise slightly quarter-on-quarter while revenue from the consumer market is anticipated to increase in “low double digits." (See Analog Devices stock analysis on TipRanks)

Analyst Rick Schafer expects the revenues from the Industrial market to rise over the long-term, with automation at factories and healthcare “leading a multiyear growth cycle, with these sub-segments growing >10% LT.”

The analyst also said that while the management expects revenues from the communications market in China to be flat in the second half of this year, Schafer expects that this market could show an uptick.

The analyst added, “The company remains on track to close MXIM [acquisition of Maxim] this summer. Management expects ~$3.5B in cash and net leverage <1x upon deal close. With ~$2B of excess cash post MXIM close, we believe ADI will return >100% of FCF to shareholders through buybacks and, to a lesser degree, dividends. Looking ahead, we see growth accelerating led by 5G/auto/industrial.”

Consensus among analysts on Wall Street is a Strong Buy based on 8 Buys and 1 Holds. The average analyst ADI price target of $179.63 implies approximately 6.6% upside potential to current levels.

Bottom Line

Based on the upside potential over the next 12 months, NXP seems to be a better Buy.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.