The European Commission wants to increase state aid to European companies operating in the semiconductors sector, according to the Commission's announcement earlier this week regarding the European Competition Law Review.
With this initiative, the European Commission also intends to promote alliances between semiconductor companies and strengthen the supply chains which are still damaged due to the Covid-19 crisis.
At this point, it is reasonable to expect that European manufacturers of semiconductors should receive a strong tailwind from the enactment of the Commission's proposal. Thus, the European semiconductors industry seems to be in a better position now to surpass analysts' estimates in the upcoming years.
Statista says that the aggregate revenue for the European semiconductor industry is expected to reach $51.14 billion in 2022, reflecting a 35% upside from 2020. Driven by further state investment, this increase could become higher.
Investors looking for big names amid European semiconductors may want to consider NXP Semiconductors N.V. (NXPI, Financial), in my opinion, as this Eindhoven, Netherlands-based producer of various semiconductor products is a leading supplier for the automotive, tech and communication infrastructure markets worldwide.
In the third quarter of 2021, NXP Semiconductors reported diluted earnings of $1.91 a share, a switch from a year-ago net loss of 8 cents, on revenue of $2.86 billion. Helped by the customers' adoption of the company's latest products coupled with exceptional levels of long-term demand trends across end markets, total revenue increased more than 25% year over year, beating analysts' projections by 2.76 billion. The company beat analysts' estimates on earnings as well since they were looking for NXP Semiconductors to earn $1.80 per diluted share.
The company is confident that the growth in the demand for its semiconductor products will remain robust in the final quarter of 2021 and across the entire year of 2022.
For the fourth quarter, NXP Semiconductors targets revenue to come in at $3 billion, up 20% year over year and in line with analysts' expectations. Also, the company says that the gross margin rate is projected to be 56.5% of total revenue, up 360 basis points year over year while the operating margin should hit 33.8%, a 330 basis points increase from the prior year.
To improve execution on its plan to boost supplies against persistent market shortages, NXP aims to strengthen its financial conditions by financing the postponement of the $1 billion bond loan expiration beyond 2022.
In the recent collaboration with Ford Motor Company (F), NXP will equip the U.S. car manufacturer’s vehicles with Dutch semiconductors across the global fleet, which will provide additional steam to the sales.
This stock holds some catalysts which could make its share price ($217.81 at close on Wednesday) seem undervalued in hindsight. The average target price of $242.24 that Wall Street sell-side analysts forecasted in November already indicates that the stock is underpriced based on the company's growth potential.
Following nearly 45% growth over the past year, the stock price is now trading above the 50-day moving average value of $201.51, which makes it look expensive. However, since the rising demand for semiconductors and the continuing supply crunch are fueling strong near-term growth potential, I think the stock could safely trade at higher valuation levels.
