Here's Why the Best Is Yet to Come for NXP Semiconductors N.V.

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It might seem pointless to invest in NXP Semiconductors (NASDAQ: NXPI) now, since Qualcomm (NASDAQ: QCOM) is trying to buy the Dutch chipmaker for $38 billion. NXP's upside potential might seem limited -- with the stock trading higher than Qualcomm's $110-per-share all-cash offer -- but it might rise even higher next year for four simple reasons.

1. An activist push for a higher buyout offer

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Qualcomm initially announced its planned buyout of NXP last October. However, the deal faces stiff opposition from activist investor Elliott Management, which holds a 6% stake in NXP.

Elliott argues that NXP is worth $135 per share, based on the intrinsic value of its automotive and industrial semiconductor businesses. Qualcomm argues that claim is "unsupportable" and an attempt to advance Elliott's "self-serving agenda."

However, the valuations indicate that Qualcomm isn't really paying a huge premium for NXP, the biggest automotive chipmaker in the world. Qualcomm's $110 offer values NXP at just 15 times next year's (fiscal 2018) earnings. Elliott's recommendation of $135 -- a 16% premium to its current price -- would still value the stock at less than 19 times next year's earnings.

2. A low percentage of tendered shares

Unfortunately for Qualcomm, most NXP investors seem to agree with Elliott. For Qualcomm's $110-per-share offer to be approved, at least 70% to 80% of NXP's shareholders must tender their shares.

However, the percentage of tendered NXP shares fell from almost 15% in February to less than 2% in December, forcing Qualcomm to extend its offer to Jan. 12, 2018. It's highly unlikely that Qualcomm will win over NXP's remaining shareholders by then, so it should extend the offer on that date.

3. Broadcom could place a rival bid

The situation is further complicated by the fact that Broadcom (NASDAQ: AVGO) is also trying to buy Qualcomm. Qualcomm rejected Broadcom's $105 billion offer in November, but Broadcom is currently trying to replace Qualcomm's board to set the stage for a proxy fight or a higher bid next year.

Broadcom has sent mixed messages about NXP. On different occasions, it stated that it would buy Qualcomm regardless of the fate of NXP, that it might kill the proposed deal, or that it could buy both Qualcomm and NXP separately. This means that either Qualcomm or Broadcom could place even higher bids for NXP.

4. Growth potential as a stand-alone company

Unlike other struggling companies which need a buyout bid to prop up their stock prices, NXP has plenty of other growth catalysts. Its automotive chip business, which accounted for 40% of its sales, generated 11% annual revenue growth last quarter on rising market demand for connected cars.

During that quarter, sales of its Secure Connected Devices (SCDs) -- which accounted for 30% of its top line -- rose 20% annually on robust demand for its mobile transaction and general purpose microcontroller products. Its total revenues fell 3%, partly due to the softness of Secure Identification Solutions business, but its net income still rose 19% -- thanks to the year-over-year expansion of its gross margin (from 48% to 50.9%).

Analysts expect NXP's earnings to rise 10% this year and 11% next year, as demand in its automotive and industrial markets rises on the expansion of the Internet of Things.

The key takeaways

Investors shouldn't expect NXP to soar from its current levels, since it's a mature tech stock that is close to being bought out. But investors also shouldn't assume that the stock has run out of room to run.

The uncertain future of the Qualcomm deal, Broadcom's bid for Qualcomm, and NXP's growth potential as a stand-alone company in an increasingly connected world still make it a viable investment at current prices.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of Qualcomm. The Motley Fool recommends Broadcom Ltd and NXP Semiconductors. The Motley Fool has a disclosure policy.