NXP Semiconductors (NASDAQ: NXPI) share price action in 2024 is weighed down by headwinds, but the long-term uptrend is intact. The headwinds include macroeconomic pressure and weakness in critical semiconductor end markets, which the company cannot control. It can control operational quality and capital return, which investors should focus on today.
The macroeconomic headwinds have pressured the stock price to a more attractive level and a price floor indicated by the analysts; operational quality, cash flow, capital return, and improving business leverage will support the market at these prices and lead to a solid buy signal. It may take a quarter or two for the consolidation to run its course; when it does, NXPI stock will resume the uptrend and move up to new all-time highs.
NXP Semiconductors Can Sustain Its Capital Return
NXP Semiconductors had a lackluster Q3, with revenue falling 5.2% to $3.25 billion, aligning with the analysts' consensus reported by MarketBeat. The weakness is due primarily to the communications and IoT end markets, which fell by 19% and 7%, respectively. Automotive was down only 3%, and mobile grew by 8%. The bottom-line strength offsets the top-line weakness, with the adjusted gross margin at 58.2% and the operating margin at 35.5%.
The critical details today include the cash flow and free cash flow, which are robust enough to sustain the capital return program while maintaining a healthy balance sheet and funding growth opportunities. The free cash flow margin came in at 18%, providing nearly $600 million in capital, mostly returned to shareholders. The company’s capital return free-cash-flow payout ratio ran at 95% for the quarter and 85% on a TTM basis, leaving room for cash to build on the balance sheet.
The balance sheet highlights at the end of Q3 are favorable to investors. The company logged a year-over-year (YoY) decrease in cash caused by business investment, including the advancement of two joint ventures, but all other details are positive. The company’s long-term assets are up, offsetting the cash decline, with total assets flat, liabilities and long-term debt down, and equity up 10.75%.
Long-term debt is just over 1x equity, with total liability less than 2x, leaving the company in a strong financial position to sustain its projects until macroeconomic headwinds diminish. Because of the path of FOMC interest rate cuts, that is expected by mid-year 2025. The forecast is for at least another 75 basis points of rate reduction by June, putting the base rate at the lowest level in over two years.
NXP Semiconductors Falls on Soft Guidance
NXP Semiconductors' guidance is why the stock fell 6% following the Q3 release. However, weak relative to the consensus, even with the 5% sequential reduction in revenue, the company’s results will be sufficient to sustain financial health and capital return. The risk is that business will not improve substantially in 2025, contrary to the consensus forecasts. End markets, including automotive and IoT, are expected to return to growth and drive an 8% top-line advance and wider margin.
NXPI stock fell more than 6% following the earnings release but is unlikely to fall much further. The move aligned the market with the analysts' lowest price target, a potential floor for the action coincident with a critical support target. The critical support target is near $222, and the lows set in September match the analysts' lowest target. The first revision following the release is a reiterated rating and price target aligning with the trend, implying a 20% upside for this market and a return to the high end of the 2024 trading range.
