Many chip stocks are still pricing in a lot of bad news. But with the Philadelphia Semiconductor Index (SOXX) now up about 25% from the lows it saw in early June amid Huawei-related fears, the mixed numbers and commentary that many chip firms continue providing is likely to cause some volatility.
NXP Semiconductors (NXPI) , which is up about 1% to $105.22 following a Q2 report released on Monday night, provides the latest case in point. The Dutch chipmaker beat Q2 estimates with the help of better-than-expected NFC radio chip sales in the smartphone market, but also guided for Q3 revenue of $2.21 billion to $2.27 billion, down 7% to 10% annually and below a consensus estimate of $2.35 billion.
While explaining its Q3 guidance on its earnings call, NXP, the world's biggest microcontroller (MCU) supplier, noted macro/trade uncertainty is still producing "subdued ordering trends" for its Automotive, and Industrial & IoT segments, which saw their sales drop 10% and 14%, respectively, year over year in Q2. CEO Richard Clemmer added that while NXP has seen "a little bit of improvement" in Chinese demand following inventory-clearing efforts by chip-buyers, it has also seen American and European demand weaken.
Also, NXP, which is also a top supplier of RF power amplifiers for mobile base stations, forecast that its Communications Infrastructure & Other segment would see sales drop slightly on a sequential basis in Q3, following a strong start to the year. With the help of early 5G infrastructure orders, the segment's revenue was up 19% annually in Q2 and 10% in Q1.
One bright spot: Ahead of Apple's (AAPL) Tuesday afternoon earnings report, and following an upbeat mobile chip sales outlook from Taiwan Semiconductor (TSM) , NXP said it expects "normal sequential order rates" from its top premium phone client, which is widely believed to be Apple. On the other hand, while NXP says its shipments to Huawei haven't been badly affected by recent U.S. trade restrictions, the company does expect a "sequential step down" in orders from an unnamed Chinese phone OEM that had ordered strongly in Q2.
On the whole, NXP's numbers and commentary have a bit in common with what rival Texas Instruments (TXN) shared a week ago. TI beat Q2 estimates while issuing Q3 guidance that was a little below consensus at its midpoint and implies a 7% to 14% annual decline. TI also said on its call that its industrial and automotive chip sales fell by a high-single digit percentage annually in Q2, and that its sales to the communications equipment market, which had been up 30% in Q1, were roughly flat in Q2.
As was the case in late April after its shares popped in response to a Q1 beat, NXP's stock is still reasonably-valued, not to mention trading at a healthy discount to TI's. Though near-term earnings are depressed by the current industry downturn, NXP still only trades for 13.5 times a 2019 EPS consensus of $7.74, and 11.6 times a 2020 EPS consensus of $9.08.
Much like the surge that Micron (MU) witnessed after issuing light guidance in June, NXP's multiples go a long ways towards explaining why its stock is ticking higher (if only slightly) in spite of its light Q3 outlook. This is still a company that has market-leading positions in a slew of chip markets that are poised to grow thanks to secular trends such as electric car adoption, growing IoT device shipments, 5G network rollouts and rising NFC attach rates for smartphones. Many of the investors buying its shares today in spite of its outlook -- or simply choosing not to sell thanks to its guidance -- probably haven't forgotten that.
Still, while NXP continues to price in a fair amount of bad news, it's doing so to a somewhat lesser degree than it was in late May and early June, when shares briefly dipped below $90. And it's certainly doing so to a lesser degree than it was at the start of 2019, when its stock traded in the low-70s following December's panic selling.
And given that most of NXP's peers are also pricing in negative headlines to a lesser extent than they were a short while ago, chip stock investors should brace for some near-term volatility in the event that some surprising bad news -- say, related to trade tensions or demand in one or more key end-markets -- arrives. There's still value to be found in this space, but the margin for error is a little different than it was before.