NXP Semiconductors

NXP Semiconductors reported second-quarter revenue of $3.50 billion, up 19% year over year and above the midpoint of guidance. NXP expects September-quarter revenue of $3.75 billion, up 18% year over year and ahead of FactSet consensus estimates of $3.71 billion.

Why it matters: We're pleased with NXP's solid results and strong growth across key end markets. NXP's automotive chip business fared better than expected, and we're encouraged by management's comments that growth is coming from content gains rather than inventory restocking. Automotive chip revenue grew 12% year over year, modestly ahead of guidance, and NXP's content in newer areas of the car, such as software-defined vehicles, seems to be paying off. Industrial and Internet of Things revenue grew 38% year over year. We were encouraged to hear about a $1.5 billion design win funnel for its physical and edge artificial intelligence processors. We think this opportunity is in its early days, but NXP should be well-positioned to expand here.

The bottom line: We maintain our $310 fair value estimate for wide-moat NXP. Shares appear undervalued to us after a wild ride from just under $200 in April to a high of $339 and down again. Shares fell another 5% after hours to $246. We suspect investors were seeking even stronger growth from NXP, or perhaps a boost to its data center revenue forecast, which NXP maintained at $500 million for 2026. While we're pleased with NXP's data center business, and $500 million is a nice boost from $200 million the year prior, we don't see NXP as the best AI chip play in our coverage. This may leave NXP cheap for investors seeking high-quality automotive chip exposure, rather than an AI bottleneck.

Coming up: In addition to a forecast of 7% sequential revenue growth in the third quarter, NXP expects a 50-basis-point sequential improvement in gross margin to 58.5%.

BLANK PAGEWe've been pleased with NXP's steady march toward higher gross margins, driven by content gains, manufacturing efficiencies, and a flexible manufacturing model. NXP is passing along higher input costs as well, and we think the firm wields solid pricing power overall.

Our fair value estimate is $310 per share, which implies a 2026 and 2027 adjusted price/earnings ratio of 20 times and 15.5 times, respectively, and a 6% free cash flow yield.

NXP prospered from peak business conditions during the global semiconductor shortage, with revenue growth of 28.5% in 2021 and 19% in 2022. Semis are inherently cyclical, and NXP faced cyclical headwinds thereafter, causing revenue to grow only 0.5% in 2023 while falling 5% in 2024 and another 3% in 2025. However, we believe these cyclical headwinds have abated, and NXP will ship in line with a cyclical upturn. We model 15% revenue growth in 2026 and 11.5% growth in 2027 for NXP. NXP should see a rebound in industrial chip demand, ongoing content gains within the automotive sector (NXP’s largest end market in the 55%-60% range), and new design wins as part of the massive AI data center infrastructure buildout. We model 8% midcycle growth thereafter, a couple of percentage points above our prior estimates, thanks to faster data center product growth. Beyond data center, we anticipate that NXP will continue to thrive by selling higher chip content in cars and industrial devices.

At its November 2024 analyst day, NXP outlined a revenue growth target of 6%-10% through 2027. However, the targets didn’t forecast the sharp cyclical downturn faced by the semis industry in 2025, nor the rise in tariffs and greater macroeconomic uncertainty that we've seen in the past two years. Despite the 3% revenue decline in 2025, NXP reiterated that it can still reach this 6%-10% CAGR by achieving double-digit revenue growth in both 2026 and 2027.

By end market, NXP targeted 8%-12% automotive revenue growth through 2027. While we think this was a reasonable target pretariffs and predownturn, we now model only a 7% CAGR through 2027. NXP's target in industrial and Internet of Things revenue was also 8%-12%, but we think NXP will exceed this target with a 13% CAGR. Half of NXP’s data center revenue falls into this IIoT segment.

NXP earned a strong adjusted gross margin of 58% in both 2022 and 2023, and we were impressed that NXP maintained this 58% margin in 2024 despite flattish revenue. Lower revenue caused adjusted gross margin to fall to 57% in 2025, but we model a recovery to 58.5% in 2026 and nearly 61% in 2027, above the midpoint of management's target of 57%-63% from its analyst day. We concede that higher revenue above our projections would likely boost margins toward the high end of this range. Management indicated that it can generate a 58% adjusted gross margin at an annual run rate of $13 billion of revenue, with 100 basis points of expansion for every $1 billion of incremental revenue thereafter.

Similarly, adjusted operating margin reached a high of 36% in 2022, came in at 35% in both 2023 and 2024, and fell modestly to 33% in 2025. We anticipate a recovery to 39% by 2027, toward the high end of management's pretariff target of 34%-40%.

We believe NXP Semiconductors warrants a wide economic moat rating, consistent with several other broad-based analog and mixed-signal semiconductor peers. We believe that moats for NXP (and its peers in broad-based semis) come from intangible assets around proprietary analog and mixed signal (that is, analog and digital) chip design and manufacturing expertise, as well as switching costs that make it difficult to swap out analog and mixed-signal chips for competing offerings once they are designed into a given electronic device.

We believe that leading broad-based chipmakers like NXP (which we consider to be those well-versed in analog, mixed signal, and microcontroller semis) benefit from favorable characteristics that lend themselves to economic moats. First, we believe that engineering talent (especially in analog) is difficult to come by, as greater emphasis is placed on digital chip improvements, and it often takes years to train up-and-coming analog engineers in the intricacies of chip designs. Thus, it is extremely difficult for startups to replicate the many years of analog expertise held by incumbents. Leading broad-based chipmakers also face stringent quality requirements in some end markets, such as the automotive industry, for example, where defects can only be tolerated as low as one part per million. Although the broad-based chip market is quite fragmented, it would be difficult for any startup to achieve this level of quality while still satisfying high-volume production.

Furthermore, broad-based semis like analog and microcontroller, or MCU, parts tend to make up only a small portion of a product's bill of materials, so purchasing decisions tend to be based on performance rather than price, helping firms retain pricing power. A lower quality tolerance might be acceptable in devices with shorter useful lives, such as smartphones, PCs, and consumer gadgets, but moaty chipmakers tend to have limited exposure to these end markets.

Regarding customer switching costs, we believe that engineers loathe to swap out an analog or MCU from an existing design (again, only to save a few pennies on cost) because of the onerous redesign and retesting costs associated with the switch. Further, customers also become accustomed to the software and development tools used to test and design a given product.

In our view, Exhibit A for our switching cost thesis is the global chip shortage of 2021 and 2022. Instead of finding untested suppliers or securing any reasonably performing chip they could get their hands on, automotive and industrial companies halted production of their gadgets until their key chip suppliers could get the proper, reliable, well-tested, well-designed parts into their customers' hands. We did not see any meaningful market share loss during the shortage, as customers again waited to receive the necessary chip, rather than redesign their products to take on a lower quality chip instead.

In addition to these favorable moat sources, broad-based chips are trailing-edge products that don’t require the hefty investments needed by digital processors to move down Moore’s law. In turn, broad-based chipmakers profit by having lower ongoing R&D and capital expenditure investments, which helps to contribute to healthy returns on capital for shareholders.

Further, buyers of analog semis typically don't demand smaller chips packed with more transistors, but rather, reliable products that deliver the desired accuracy and precision in power management or signal processing. Shrinking the chip might not necessarily enhance accuracy (and might even serve to reduce it), so analog chips tend to be made with lagging-edge manufacturing techniques.

NXP is an automotive chip leader, with reliable products and strong customer relationships. This should give it an edge in newer technologies, such as 77 GHz radar and battery management systems.

NXP should generate healthy margin expansion as it grows across a variety of end markets and has exited some commoditylike businesses.

NXP is the clear leader in mobile wallet solutions, which incorporate NFC and secure element chipsets along with its software. As mobile payment adoption expands worldwide, NXP is poised to benefit.

NXP’s dependence on the automotive market makes it vulnerable to cyclical downturns, which occur in global light-vehicle sales from time to time.

China is an important growth market for NXP but counts several national champions as large customers, thus exposing NXP to geopolitical risk and greater competition over time.

Tariffs and geopolitical risks may limit car unit sales, in turn limiting NXP's automotive growth even if it gains more chip content per car.