Does The Qualcomm Acquisition Value NXP Semiconductors Fairly?

NXP Semiconductors (NASDAQ: NXPI) has seen mixed results in recent years. The company saw its revenue decline by 2.5% in 2017, mainly due to the sale of its Standard Products division in early 2017.  However, the company’s EPS jumped from $0.58 in 2016 to $6.41 in 2017, and the stock price saw a double-digit growth because of strong performance from the High Performance Mixed Signal (HPMS) division.

With Qualcomm announcing that it has entered into a definitive agreement to acquire NXP at about $127.50 per share, the future looks interesting for NXP. Our valuation dashboard suggests that the Qualcomm bid may be a tad cheap, indicating that Qualcomm made a smart move. Below we discuss how we estimate NXP’s valuation. Detailed steps to arrive at our price estimate and the revenue calculations are outlined in our interactive dashboard. You can modify our assumptions to arrive at your own price estimate for the company.

$129 Price Estimate For NXP

We have a price estimate of $129 for NXP Semiconductors, which is slightly ahead of the current market price. This is based on revenue projections of about $10.2 billion. The company will benefit from increasing demand for chips from the auto industry, driven by increasing global automobile production and the growing appetite for sophisticated infotainment systems. Also, stronger demand for electric vehicles will drive the electrification of drivetrains, which should fuel sales of auto semiconductors. The growth of IoT (Internet of Things), especially in Mobile payments, should drive the sales of Secure Connected Device (SCD) semiconductors.

Furthermore, we expect NXP’s earnings margin to increase slightly, driven by effective cost management that should further drive down the cost of revenue. We forecast net income of about $2.6 billion, or adjusted EPS of about $7.40. Finally, using our estimated P/E multiple of 17.5 gives us $129 as a fair price estimate.

Our revenue estimate of $10.2 billion for 2018 is a sum of the High Performance Mixed Signal (HPMS) Revenue and Corporate & Other Revenue. HPMS revenue is arrived at by summing up the semiconductor revenues from Automotive, Secure Identification Solutions (SIS), Secure Connected Devices (SCD), and Secure Interface and Infrastructures (SI&I). Driven by increasing automobile production and digitization, we expect Automotive revenue to grow 16% year-on-year to reach $4.4 billion in 2018. Also, growth in IoT should fuel the 16% year-on-year growth in SCD revenues to $3.5 billion.

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