Why Cypress Semiconductor Is an Opportunity You Shouldn’t Miss

It looks like Cypress Semiconductor (NASDAQ: CY) isn't going to let up anytime soon. The chipmaker delivered terrific gains in 2017 thanks to its strategy of chasing fast-growing opportunities within the semiconductor space, and the trend will continue this year, as its latest results indicate.

Cypress recently announced terrific fourth-quarter earnings, reporting 12.7% year-over-year growth in revenue that helped it slash its GAAP net loss in half, to $36 million. What's more, the chipmaker's guidance comfortably topped Wall Street's expectations, setting the stage for another banner year in 2018.

Here's why Cypress Semiconductor remains a good bet despite a strong run over the past year.

Automotive growth will accelerate

Cypress' automotive business is growing at an impressive pace, which is great news for investors as it supplies 30% of the company's total revenue. The segment's revenue jumped 16% year over year last quarter as it used its automotive connections to sell more semiconductor content for use in vehicles.

Cypress says that it is supplying wireless-connectivity chips to the top eight automotive original equipment manufacturers. This puts the chipmaker in a great position to take advantage of the growth in the global automotive semiconductor market, which is expected to hit $46 billion in revenue in the next five years, according to Research and Markets.

Cypress has stepped up its product development, as it doesn't want to miss this boom, recently releasing a couple of new automotive-grade connectivity chips. One of these chips combines Bluetooth and Wi-Fi on a single platform, allowing multiple users in a car to connect to its infotainment system for streaming unique content. Cypress is already shipping this product for a couple of cars.

The other automotive product is an advanced touchscreen controller capable of detecting a finger from 35 millimeters above the screen, while accurately measuring the pressure applied by the finger.

Clearly, Cypress is going all out to carve a bigger slice of the automotive market, and this should give its top line a nice boost in the coming years as vehicle connectivity gains traction.

Strong catalysts in the consumer business

The consumer business is Cypress' largest source of revenue, accounting for 35% of the top line. The good news is that the chipmaker is going after several fast-growing opportunities in the consumer segment, like smart homes, smart lighting, and smart speakers, among others.

For instance, Cypress' chips are powering a variety of smart speakers by Amazon's Alexa and Google Home. And in the smart-lighting market, Cypress says German lighting company LEDVANCE has selected Cypress' Bluetooth Low Energy (BLE) solution for use in the industry's first certified Bluetooth mesh product.

The advantage of Bluetooth mesh technology is that the user doesn't need to be in the vicinity of the device to control it. Instead, devices on a network can communicate with one another to send the command to the intended device, eliminating the need for additional hubs. Cypress is pushing the envelope in smart lighting with such product development efforts, and this could be a big deal in the long run as this space is expected to grow at a massive annual rate of 71% through 2022, according to MarketsandMarkets.

Cypress could soon become profitable

I have already mentioned that Cypress' GAAP net loss was cut in half during the fourth quarter, primarily driven by an expansion in the company's margins. In fact, Cypress' GAAP gross margin increased to 41% in fiscal 2017 as compared to 35.6% in the prior year, while non-GAAP gross margins increased 320 basis points over the same period.

The increase in Cypress' gross margin has filtered down to its operating margin as well, leading to a sharp reduction in its net loss over the past year.

More importantly, Cypress' margin expansion is driven by a healthy mix of cost reductions, an increase in sales of higher-margin products, and across-the-board price hikes. Approximately two-thirds of its gross margin expansion last year was because of cost-cutting and a better product mix, while the remainder was driven by an increase in prices across its product portfolio.

Also, the company is laser-focused on enhancing its factory utilization rates to enhance production efficiencies and drive down product costs. Looking ahead, the company's margins should remain at strong levels because of a potential increase in contributions from Internet of Things business, like connected cars and smart homes.

Analysts estimate that Cypress' earnings will grow at a compound annual rate of 23.8% for the next five years, so the company is set to get into the black sooner rather than later.

It isn't too late for investors to get into Cypress Semiconductor because the stock trades at 14 times forward earnings, while the industry average is 31, making it an ideal pick for anyone looking to buy into the emerging tech trends mentioned above.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Amazon. The Motley Fool recommends Cypress Semiconductor. The Motley Fool has a disclosure policy.