The Great Chip Consolidation: Who's Next?

Daniel Laboe
·4-min read

2020 has been a year of consolidation in the semiconductor space. The biggest chip deals in history are occurring in one of the most unprecedented markets, as the global economy suffers from a medically induced coma.

Nvidia (NVDA) is in the midst of closing a $40 billion deal (roughly 50% in stock) for Soft Bank's (SFTBY) Arm Holdings. This deal will be the largest in semiconductor history if it can get past the regulatory bodies involved, including China (which could cause obstacles).

Investors greenlit Analog Devices' (ADI) $20.9 billion all-stock acquisition of Maxim Integrated (MXIM) in mid-October.

Advanced Micro Devices (AMD) officially announced its plan to buy competing chip maker Xilinx (XLNX) following its Q3 earnings release Tuesday, October 27th. The deal was released as an all-stock $35 billion acquisition, which would add to the tidal wave of semiconductor merger in 2020.

Why Consolidation?

Scale, portfolio diversity, and groundbreaking innovations will be the three determining components that dictate who the world leaders in the proliferating chip market will be. External acquisitions are becoming a requirement for the biggest and baddest semiconductor giants to remain competitive. Organic internal growth is no longer enough for businesses to remain on the innovative frontier. 

The trick is acquiring the right business at the right price. An acquisition needs to provide the combined enterprise with the proper synergies to justify the purchase.

Ripe For A Buy

Below are some well-positioned chip innovators that are at just the right size for an acquisition. Investors on this side of the equation always see sizable returns due to the required premium associated with purchasing a public company.

Qorvo (QRVO) – Market Cap: $14.4B

A leading provider of radio frequency (RF) solution, a market that is expected to explode over the next 5 years as the 5G revolution connects everything. The RF market is estimated to expand at a compounded annual growth rate (CAGR) of 14%, reaching $45 billion by 2025, according to Grand View Research.

Qorvo would make a tremendous 5G purchase for chip giants and retail investors alike. Analysts have been raising their guidance with 5G demand expectation surging. QRVO currently sits at a Zacks Rank #1 (Strong Buy).

NXP Semiconductor (NXPI) – Market Cap: $37.2B

This innovation-driven company is on the front lines of autonomous driving and smart automobiles, with its automotive segment making up 47% of NXP's 2019 revenue. Its other divisions include industrial & IoT, mobile, and communication infrastructure, in that respective order of topline drivers.

NXP Semiconductors is one of those businesses primed to take-off through the roaring 20s, and it's still trading at a reasonable enough price to justify a long-term investment.

Qualcomm (QCOM) attempted to purchase this company for $47 billion in October of 2016, but the deal kept getting pushed back because of regulatory issues. The Chinese administration would not approve the deal, which eventually led to its down fall, costing Qualcomm $2 billion in the process. NXP's China operations could be a big hurdle with any merger moving forward if the US-China trade war continues at its current state.

Final Thoughts

The technology sector is blasting off in the wake of the first global pandemic in over a century. The world has been scrambling to stay functional while practicing self-isolation. Tech has been the saving grace of the COVID-19 pandemic allowing society to work, shop, and be entertained without walking out their door. Semiconductors are at the heart of every advanced technology, from your smartphone to self-driving cars.

These chip companies I discussed are not only ripe for an acquisition but ripe for a portfolio addition as well. This recent market volatility is providing us with an opportunity to get into these semiconductor innovators at a discount. Take advantage of market pullbacks.

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Xilinx, Inc. (XLNX) : Free Stock Analysis Report
Softbank Corp. (SFTBY) : Free Stock Analysis Report
Qorvo, Inc. (QRVO) : Free Stock Analysis Report
QUALCOMM Incorporated (QCOM) : Free Stock Analysis Report
NXP Semiconductors N.V. (NXPI) : Free Stock Analysis Report
NVIDIA Corporation (NVDA) : Free Stock Analysis Report
Maxim Integrated Products, Inc. (MXIM) : Free Stock Analysis Report
Advanced Micro Devices, Inc. (AMD) : Free Stock Analysis Report
Analog Devices, Inc. (ADI) : Free Stock Analysis Report
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