Cypress Stock Has Many Growth Catalysts
Today’s stock represents one of our favorite methods of investing in growth stocks. It is called the “picks and shovels” method, which involves investing in stocks of companies that supply key products and services to a rising technological trend. The popular trend being talked about here is that of the Internet of Things (IoT) and implies the rise of connectivity, whether it be homes, our cars, or in factories. Interconnected machines are on the rise in our digital world and such businesses gain on the back of rising demand for their solutions. By investing in these picks-and-shovels stocks, investors stand to gain superlative returns in a short span of time.
The case in point being Cypress Semiconductor Corporation (NASDAQ:CY), which is a leading player in embedded systems and manufactures advanced embedded system solutions for automotive, industrial, consumer electronics, home automation, and many more markets that stand to gain from this connectivity trend. The connectivity solutions provided by Cypress include programmable systems-on-chip (SoC), general-purpose microcontrollers, and Analog Integrated Circuits (ICs) etc.
Last year, the company introduced the world’s only microcontroller platform optimized for the Internet of Things and launched the “Cypress 3.0” brand, which is aimed at growing in the highly profitable markets like automotive and industrial. Cypress is executing well on its transformation toward these higher-growing markets in the IoT space. This bodes well for CY stock going forward.
In the second week of January, the company announced the industry’s most advanced automotive touchscreen controller for the next-generation infotainment systems. It also introduced solutions that enable users to enjoy the same connectivity, rich multimedia content, and experience in a vehicle that they get at home. (Sources: “Cypress Brings Superior Infotainment Experience to Connected Cars,” and “Cypress Introduces the Industry’s Most Advanced Automotive Touchscreen Controller,” Cypress Semiconductor Corporation, January 9, 2018.)
Cypress has a lot of potential in each of its high-growth markets, especially the automotive market. According to a research report by IHS Markit Ltd (NASDAQ:INFO), the electronics content continues to increase per car from $312.00 in 2013 to $460.00 in 2022. (Source: “Automotive Semiconductor Market Tracker,” IHS Markit Ltd, January 9, 2018.)
This translates into an impressive 7.1% compound annual growth rate (CAGR) from 2016 to 2022 when the market is likely to touch $48.0 billion. Moreover, electronics for hybrid and electric vehicles continues to be the fastest growing segment with 19% CAGR with Advanced Driver Assist Systems (ADAS).
Cypress Semiconductor is well-positioned to gain from the evolving automotive market. As the vehicles of tomorrow continue to add new connected car features, CY stock shall post further gains.
Cypress announced third-quarter results in October last year and posted record revenue of $604.6 million. The Internet of Things wireless connectivity grew by a phenomenal 80% year-over-year and non-GAAP diluted EPS increased 29% sequentially. (Source: “Cypress Reports Third Quarter 2017 Results,” Business Wire, October 26, 2017.)
Cypress CEO and president, Hassane El-Khoury said, “We continue to strengthen our position as the Internet of Things (IoT) leader with our state-of-the-art IoT connectivity solutions, flexible microcontrollers and high-performance memories.” He further added that the company’s IoT solutions were adding intelligence and connectivity to customer products across the targeted end-markets like automotive and industrial.
The latest results are evidence enough that the Cypress 3.0 strategy is achieving the desired objective. Following this strategy, the company sells embedded solutions into markets growing faster than the overall semiconductor industry. Approximately 80% of the company’s revenue was generated by customers who bought more than one product family across connectivity, microcontrollers, and memory. (Source: Ibid.)
The strong performance has translated into superior stock returns as well. Cypress stock has gained about 70% in the last five years and almost 57% in the last one year. However, as the chart below shows, the ride has not been smooth.
Chart courtesy of StockCharts.com
However, things have improved over the last one year, with the company executing well on its transformation and pushing into the high-growth market for IoT and automotive chips.
The IoT player continues to add innovations to its product portfolio and is less susceptible to the cyclicality that is associated with semiconductor stocks. If it continues executing well on the current growth strategy, Cypress stock is likely to post superior gains in the coming days.
Cypress Semiconductor Corporation is a dominating player in the IoT arena and its strategy of focusing on profitable growth in its key markets seems to be paying off. With the rising demand for connectivity solutions in the coming years, CY stock is bound to go higher.
This picks-and-shovels stock is a great way of playing the IoT trend. As Cypress stock has run up over the last few days, investors could build positions on any sign of weakness.