NXP Semiconductors trades at $226.70 and has moved in lockstep with the market. Its shares have returned 19.3% over the last six months while the S&P 500 has gained 18.8%.
Is there a buying opportunity in NXP Semiconductors, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is NXP Semiconductors Not Exciting?
We're cautious about NXP Semiconductors. Here are three reasons you should be careful with NXPI and a stock we'd rather own.
1. Revenue Tumbling Downwards
Long-term growth is the most important, but short-term results matter for semiconductors because the rapid pace of technological innovation (Moore's Law) could make yesterday's hit product obsolete today. NXP Semiconductors’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 4.1% over the last two years. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect NXP Semiconductors’s revenue to rise by 5.3%. While this projection implies its newer products and services will spur better top-line performance, it is still below average for the sector.
3. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, NXP Semiconductors’s margin dropped by 8.4 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. NXP Semiconductors’s free cash flow margin for the trailing 12 months was 16.3%.
Final Judgment
NXP Semiconductors isn’t a terrible business, but it doesn’t pass our quality test. That said, the stock currently trades at 18.2× forward P/E (or $226.70 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. Let us point you toward our favorite semiconductor picks and shovels play.
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