Stay Away From This Semiconductor Stock…For Now

By Harsh Chauhan - October 20, 2012 | Tickers: AMZN, AAPL, CY, NVDA | 0 Comments

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It seems like “macroeconomic concerns” will be the most commonly used defense by companies this earnings season, especially those in the semiconductor industry. Out of the few semiconductor stocks that I have covered so far this month, all of them have cited global concerns as the reason behind their predicament.

While some companies are actually correct in blaming the current economic conundrum for their woes, some also use this ruse to hide their deficiencies. Take Cypress Semiconductor (NASDAQ: CY) for example, which released its third-quarter earnings just recently. The company’s year over year revenue decline was 23%, net income more than halved, and its CEO was of the opinion that they put up “a good quarter in tough times.”

Tough Times Indeed

While it’s true that Cypress matched consensus estimates in the quarter, but again, one shouldn’t forget that this is a company which has trimmed down investors’ wealth by 40% this year. Moreover, a weak guidance for the ongoing quarter was no surprise. Cypress expects its top line to shrink further, as “increasing global macroeconomic concerns, which have now impacted China,” led to lower orders by Cypress’ customers and distributors.

So far, Cypress’ reasons behind its weak performance seem valid. But, the company derives most of its revenue from a product known as TrueTouch, which is a touchscreen controller that is used in smartphones and tablets. Sales of smartphones and tablets have been growing at a terrific rate even though there are “macroeconomic concerns,” and are driving sales of Cypress’ TrueTouch as it is the only product line expected to grow this quarter.

But then, Cypress’ touchscreen controllers are used across a wide number of devices, which is evident from the fact that it shipped its one-billionth capacitive touch-sensing unit last quarter. However, very few of these devices have been successful in the magnitude of Apple’s ) iPhone or iPad or Samsung’s Galaxy line.

Kindle Might not Rekindle Prospects

For example, Cypress is supplying its controllers to Amazon.com ) for the 8.9-inch Kindle Fire HD, which is priced at $299. However, it seems that the Kindle Fire HD isn’t going to be as successful as the previous Kindle or even its smaller 7-inch cousin, and this is not good news for Cypress.

According to Chitika Insights, the 7-inch Kindle Fire HD is facing tough competition at the hands of Google’s Nexus 7. Now, since Amazon’s smaller tablet is facing stiff competition at the hands of the Nexus, the 8.9-inch version would find it more difficult to become a bestseller at its $299 price point.

Again, Apple has lined up another event on October 23 where it will most probably be showing off a smaller version of the iPad. Now, I expect a smaller iPad to benefit from the success of its bigger brother, and rule the smaller tablet category. In addition, an expected price tag of $350 could even sound the death knell of the 8.9-inch Kindle Fire HD, which, in turn, doesn’t bode well for Cypress.

Not Enough Traction

And coming to smartphones, Cypress boasts about the fact that it won a big contract at Pantech, which is a “premium cell phone company” in Korea and ranks after Samsung. Well, it seems that Cypress’ partnership with NVIDIA ) isn’t working too well after all, as Cypress is unable to gain solid traction at well-known smartphone makers.

Cypress has a partnership with NVIDIA for developing high-performance touchscreen designs for Android-enabled devices. These touchscreen designs utilize NVIDIA’s Tegra 3 processor, which we saw in HTC’s flagship, the One X and the Nexus 7. However, the NVIDIA Tegra 3 processor isn’t a rage in the mobile computing world and hasn’t gained much traction yet. Moreover, major players haven’t favored Cypress much yet as the Nexus 7 used a touchscreen controller by ELAN Microelectronics despite running on a Tegra 3.

The Takeaway

Cypress’ major product is not finding favor at companies who are driving the mobile computing revolution, and most of its end-markets are expected to decline. In such circumstances, it would be prudent to watch this company from the sidelines till there is visibility about its direction in the future. The design wins at Pantech and Tesla Motors for providing the chip for the 17-inch screen in the Model S are indeed impressive.

However, considering the lack of compelling customers and macroeconomic concerns, it seems that Cypress isn’t worth your money yet even with its 4% dividend yield.

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