Why Cypress Semiconductor's Consumer Business Is Set to Take Off

By Harsh Chauhan Markets Fool.com

One way to take advantage of the booming market for the connected home is through chip companies, such as Cypress Semiconductor (NASDAQ: CY), that enable communication between smart-home devices and the cloud. IC Insights forecast last year that the connected-home market will create a $1 billion opportunity for semiconductor companies by 2019.

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Cypress doesn't want to miss the gravy train

Cypress has been betting big on this space through mission-critical wireless-technology solutions, such as Wi-Fi and Bluetooth low-energy chips. The chip specialist says it has developed the broadest range of wireless connectivity solutions to attack this opportunity, outpacing the likes of Qualcomm and MediaTek.

Image source: Cypress Semiconductor

In fact, Cypress claims that its ultra-low-power microcontrollers consume 26% less power than the nearest competitor, ensuring a long battery life. The company achieves this efficiency by teaming up its latest programmable-chip architecture -- which is built for Internet of Thingsapplications such as smart homes -- with a Wi-Fi/Bluetooth combo chip.

The microcontroller chip takes care of all the sensor-related applications in a smart-home setting, along with display and voice inputs, while the wireless chip ensures the secure flow of data between the devices and cloud services such as Amazon.com's Web Services and Microsoft Azure. But the most important thing about Cypress' hardware is that it supports multiple wireless standards, including ZigBee, one of the leading connectivity protocols in smart homes.

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Sandler Research forecasts that ZigBee-enabled home automation will grow at an annual pace of 26% from 2016 to 2020, thereby expanding Cypress' revenue opportunity. What's more, the chipmaker has already rolled out a software development kit to help developers create applications using an integrated Wi-Fi and Bluetooth solution, which allows for interoperability between different smart-home devices.

For instance, Cypress' wireless pneumatic thermostats support a variety of building automation systems from Siemens, Honeywell, and others, setting itself up to tap a growing market .

The impact on Cypress' business

Cypress' consumer business was almost 30% of its revenue in 2016, but it could become bigger as the company expects this segment to grow between 10% and 15% annually, which is faster than any other business unit. This isn't surprising, as more and more home appliances, smart meters, and indoor-lighting and home-automation systems use wireless standards such as Wi-Fi to connect to the internet.

Cypress generated $1.9 billion in revenue last year, of which $550 million was from the consumer unit. At an annual growth rate of 12.5% (the midpoint of Cypress' guidance) this business would be worth almost $1 billion in 2021. By comparison, the second-fastest growing automotive business would contribute around $980 million in annual revenue if it hits the midpoint of the forecast growth rate.

Cypress' wireless solutions are also being deployed by Wi-Fi-enabled consumer devices such as gaming consoles. For instance, its dual-band Wi-Fi/Bluetooth combo solution is being used by Nintendo's latest Switch gaming console, allowing for fast data-transfer rates using a low-power chip to enable longer hours of online multiplayer gaming.

This could be a big deal for the semiconductor specialist, as the Nintendo Switch is currently the fastest-selling video game console on the market, moving close to a million units in just four weeks. But this is just the beginning, as Nintendo expects 13 million in Switch sales over the next year. This pace could substantially boost Cypress' revenue.

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Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Harsh Chauhan has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Qualcomm. The Motley Fool recommends Cypress Semiconductor. The Motley Fool has a disclosure policy.