While there has been a ton of hand-wringing over the big decline in personal computer sales and how it affects the semiconductor industry, one of the quieter areas of growth for the sector has been the use of chips in the automotive industry. In fact, according to Merrill Lynch, the automotive semiconductor market is a stunning $30 billion, and four companies dominate sales.
With the automotive chip market growing at a secular 6.5% annual pace between 2010 and 2015, the average semi content in cars has jumped from $300 to over $340. The chips are used for everything from infotainment to safety and power efficiency. In the future, the Merrill Lynch team says that advanced drive assist systems will lead the way toward at least semi-autonomous driving with chips helping with camera, processing, computing and sensor systems.
Four top companies dominate the market share for automotive semiconductors
This is considered a top play for investors looking for a chip stock with Internet of Things exposure, and it is still down a stunning 25% from highs printed in June of 2015. The NXP Semiconductors N.V. (NASDAQ: NXPI) merger with Freescale Semiconductor was widely applauded on Wall Street, and many analysts believe the merger is transforming the company into a powerhouse. It made NXP the fourth largest semiconductor company in the industry.
It is also important to note that the combined company is the number one supplier in auto semiconductors with a 14% share, as well as the number one supplier in global microcontrollers and a dominant supplier in mobile payments.
NXP is getting its chips into high-growth areas such as contactless mobile payments, the Internet of Things, mobile-phone charging, increased cellular data consumption and LED lighting. With its shares trading at a massive 40% discount to its peers, analysts are very positive on the faster earnings growth potential relative to the competition.
The Merrill Lynch price target for the stock is $105, and the Thomson/First Call consensus target is $104.28. The stock closed Wednesday at $85.05.
Some feel that this top company would be an outstanding addition to a networking giant as a takeover candidate. Infinera Corp. (NASDAQ: INFN) provides Intelligent Transport Networks, enabling carriers, cloud operators, governments and enterprises to scale network bandwidth, accelerate service innovation and simplify optical network operations. The company also has a 9% share of the automotive chip market.
Infinera’s end-to-end packet-optical portfolio is designed for long-haul, subsea, data center interconnect and metro applications. Infinera’s unique large-scale photonic integrated circuits enable innovative optical networking solutions for the most demanding networks.
Alphabet recent announcement that it will be adding 12 new data center regions, which is a definite positive for Infinera. Trading at just 13.6 times EV/EBITDA with gross margins set at 46% and EBIT margin at 8%, the stock is cheap at current levels.
The analysts’ consensus price objective for Infinera is at $22.21. Shares closed most recently at $15.45.