NXPI Earnings Preview- Testing key support levels ahead of earnings
AInvestMonday, Jul 22, 2024 1:57 pm ET
2min read
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NXP Semiconductors (NXPI) is set to report its Q2 earnings after the market close, with a conference call scheduled for tomorrow morning at 8 AM ET. Analysts currently expect the company to report an EPS of $3.20 on revenue of $3.13 billion.

Shares of NXPI rallied to $295on July 17 but have pulled back with broader tech ahead of tonight's print. The stock is coming into key support levels in this $270-280 area. This will be the key area for trader's to watch. If NXPI disappoints and falls short of expectations, then we would expect a break below this support area and set up for a test around $250.

KeyBanc expects NXP to report results in line with expectations and provide guidance that is slightly lower for the third quarter. They anticipate that demand weakness in the automotive and industrial markets, which make up more than 70% of NXP's revenue, will be balanced by channel restocking efforts to normalize distributor inventories. Keybanc's estimates for Q2 revenue and EPS match consensus at $3.13 billion and $3.21, respectively. They also project Q3 revenue and EPS to be $3.33 billion and $3.63, respectively, slightly below consensus. Keybanc notes that market sentiment is moderately negative due to concerns about automotive sector weakness and highlights that investors will focus on updates regarding the automotive and industrial cycles, China demand trends, and channel inventory replenishment progress.

Oppenheimer is more optimistic, having raised their price target for NXPI from $295 to $330 while maintaining an Outperform rating. OPCO anticipates that NXP will report in-line or better results for Q2 and a favorable outlook for Q3. They believe the core automotive and industrial markets have bottomed out and expect NXP to experience upside momentum in the second half of the year, driven by growth in radar, S32, and battery management systems. OPCO forecasts that channel inventory will remain stable at around 1.7 months, with no plans to reach historical levels of 2.5 months this year. They also see incremental improvements in Q3 and Q4, led by better sell-out trends in China and NXP's radar and RFID ramps.

Furthermore, OPCO highlights that NXP's gross margins, previously targeted at 58%, are now supported at around 70% utilization, with potential to exceed 60% as utilization approaches 85%. They believe long-term growth will be driven by NXP's increasing automotive content and market share. Both analysts agree that the automotive and industrial sectors are crucial to NXP's performance and that inventory management will play a significant role in the company's near-term outlook.

NXP Semiconductors has managed to outperform its peers through effective inventory management and securing key content wins, positioning itself for potential success in the latter half of 2024 despite a challenging macroeconomic environment. The company’s proactive approach to adjusting inventory levels in 2023 and maintaining healthy pricing has set a strong foundation. However, there are concerns regarding the health of major end-markets for the rest of the year, particularly in the automotive sector where demand has slowed, and electric vehicle (EV) penetration has fallen short of expectations. NXP aims to mitigate these challenges with strategic content and platform wins.

The demand in the communications and industrial sectors remains weak, but NXP’s well-controlled inventory offers some resilience. Opportunities in RFID and AI-enabled edge devices, driven by NXP's strong presence in microcontrollers (MCUs) and connectivity, present medium- to long-term growth prospects. Despite the challenging market conditions, NXP’s robust position in these areas suggests an underrated potential to benefit from advancements in edge AI, although this market will take years to fully develop. Although NXP outperformed expectations in 2023, the outlook for 2024 indicates a slight decline, with anticipated recovery and growth in 2025 and 2026.

Financially, NXP has maintained stable gross margins, expected to stay around the mid-58% range for the next few years, with operating margins projected to improve from around 35% in FY 2024 to 36% over the next two years. Free cash flow margins are anticipated to move into the low-20% range and eventually improve towards the mid-20% range, driving 10% free cash flow growth. While the company may not appear cheap based on discounted cash flow (DCF) valuations, it often trades at higher multiples due to its growth potential. Utilizing a margin-driven enterprise value (EV)/revenue and EV/EBITDA approach, fair value estimates place the stock in the $290 range. Despite risks from potential further declines in end-market demand and overestimated EV sales expectations, NXP’s strengths in MCUs, auto electrification, edge computing, and industrial automation support a positive long-term outlook.

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