There is something wrong at NXP and it is not the company’s business but its shareholders. Long-term investors could profit from this anomaly.
Shares in the world’s top automotive chip maker have tumbled by almost a quarter since early June, when its deal with Qualcomm QCOM -0.88% started to unravel amid an exchange of trade blows between China and the U.S. The Californian chip giant eventually let its takeover offer expire when a Chinese antitrust regulator failed to approve the deal before a late-July deadline.
Qualcomm was prepared to pay $127.50 for each NXP share, valuing the company at $44 billion. Eight weeks after Qualcomm officially walked away, NXP stock is at $92. By most measures NXP stock now looks undervalued. It changes hands for 12 times prospective earnings, compared with 14 for the Philadelphia Semiconductor Index, and Qualcomm’s former offer implies a punchy takeover premium of almost 40%.
The low stock price probably isn’t a fair reflection of NXP’s prospects. At an investor day in New York last week the company said it would grow at between 5% and 7%, thanks to its place in the supply chain for two big tech trends, driverless cars and connected factories. Importantly, its financial projections are underpinned by products that have already been built into technology platforms, giving it a good level of visibility over sales.
A man works on a tent for NXP Semiconductors in preparation for the 2015 International Consumer Electronics Show in Las Vegas. Photo: steve marcus/Reuters
NXP did lose focus on one area during the 21-month bid period: the coordinating chips that will act as the brains of driverless cars, a technology Qualcomm is working on. But this kind of chip, which Nvidia has pioneered, won’t likely be built into production-ready vehicles for many years yet.
The most plausible explanation for NXP’s meager stock-market valuation is its shareholders. Hedge funds took over after the Qualcomm deal was announced. The top five shareholders at the most recent quarter-end included Paul Singer’s Elliott Management, Dan Loeb’s Third Point, HBK and Pentwater Capital.
Qualcomm initially got a good price for NXP, which had been struggling with the integration of a big acquisition, Austin, Texas-based Freescale. As NXP’s operating performance improved, and particularly after Intel agreed to pay a sky-high multiple for Mobileye, another automotive chip maker, Qualcomm’s initial $110-a-share offer looked too low. Arbitrageurs swooped in, successfully pushed for more, and stayed--less successfully, it turned out.
Some hedge funds are probably fleeing right now, keeping the share price down. NXP has been frantically buying back stock, but not enough to offset the selling. Long-term shareholders appear to be waiting for a better price. The only way to know for certain that the hedge funds are gone is to wait until the money managers file their next quarterly shareholding reports in mid-November.
With a big stake in key tech trends, NXP should be fine on its own. Prospective investors need to be aware that there will continue to be sellers for some time yet. But waiting for the selling to end may mean missing a solid buying opportunity.
Corrections & Amplifications
The only way to know for certain that the hedge funds are gone is to wait until the money managers file their next quarterly shareholding reports in mid-November An earlier version of this article incorrectly stated that the next quarterly shareholding reports were due in mid-October.
Write to Stephen Wilmot at [email protected]