Dont Buy NXP Semiconductors, Buy Entropic Communications Instead!
In the semiconductor industry, bigger doesnt always mean better. It may seem that a huge semiconductor company with nearly unlimited resources like Intel (INTC) would be the best way to invest in the industry.
But thats not always the case.
Smaller chip companies often have higher sales and earnings growth rates. And more of them trade at cheaper valuations than the big boys. You just have to dig a little deeper to find them.
Heres a perfect example of a large cap chip maker thats not deserving of your investment dollars check out NXP Semiconductors (NXPI).
NXPI is a broad-line semiconductor company. They provide high performance mixed signal and standard product solutions for power management, digital processing, security, and more. The companys technology is used in a wide range of industries such as automotive, industrial, lighting, wireless communication, identification, and computing applications.
But being a fairly large company, with a market cap of around $6 billion, doesnt make NXPI a good investment. In fact, the financial numbers are screaming stay away to investors.
Take a look at this
NXPI pulls in over $4 billion in revenue per year, but it hasnt translated to a growing, healthy company.
You see, sales are actually shrinking. And the company has posted a loss in three out of the last five quarters. Thats not a good sign.
Whats more, the company is buried in debt. Were talking about $4.6 billion worth of debt. Thats a heavy weight on NXPIs shoulders.
And heres the worst part
As of this writing, the companys trading at a ridiculous 73x earnings! How can you justify investing in a stock thats so expensive particularly when revenues are dropping, earnings are negative, and debt is overwhelming?
Clearly, there are much better alternatives in the semiconductor industry. And in this case, smaller is better
Introducing Entropic Communications (ENTR).
Like NXPI, Entropic is a broad-line semiconductor company. But besides being a lot smaller their market cap is a mere $738 million their products are more specialized. ENTRs semiconductors are targeted for the home entertainment space. In a nutshell, their chips are used for enhanced digital broadcasting, home networking, and high speed broadband access.
What I really like about ENTR is theyre a fabless chip producer. In other words, they outsource the actual manufacturing of their products. And that allows them to keep their costs down.
So whats that mean?
ENTRs financial numbers are superior to NXPIs virtually across the board.
For one, Entropics revenues are growing. Last quarter, revenues climbed a stellar 91% year over year. Moreover, their profit growth is even more impressive. Net income soared 574% over the same period.
Now thats the kind of growth worth investing in!
And thats not all
ENTRs balance sheet is rock solid.
The companys sitting on $142 million in cash. Even better, they have zero debt. Clearly, management is focused on running a healthy company.
Heres the best part
ENTR shares are trading at just 9.5x earnings. Thats quite a bit lower than the industry average P/E of 13x. And of course, its dramatically lower than NXPIs sky high valuation.
Heres the bottom line
Being bigger isnt always better in the semiconductor industry, as is clear from the recent success of some of some major semiconductor penny stocks. On the surface, NXPI and ENTR are similar companies, operating in the same industry. But in reality, the companies are nothing alike. And without a doubt, when it comes to investing, ENTR is the way to go.
Yours in profit,
Gordon Lewis
Category: Penny Stock Alerts, Penny Stocks to Buy, Semiconductor Stocks
