Shares of Cypress Semiconductor (NASDAQ:CY) dipped on Sept. 24 after Morgan Stanley lowered its price target from $15 to $13 while maintaining its “underweight” rating on the stock. The firm claims that Cypress’ margins and earnings could contract in 2019 as NOR and NAND memory prices hit a cyclical peak.
Investors should take that gloomy forecast with a grain of salt, since Morgan Stanley is bearish on the entire semiconductor sector. They should also note that Cypress’ niche chips are better insulated from cyclical headwinds than other mainstream chips. Let’s examine four reasons investors should buy, not sell, Cypress’ stock after this pullback.
1. Understanding Cypress’ memory markets
First and foremost, Cypress doesn’t compete against memory chip giants like Samsung(NASDAQOTH:SSNLF) and Micron (NASDAQ:MU), which lead the traditional NAND and DRAM markets. NAND chips are used in flash memory devices like SSDs and SD cards, while DRAM chips are used in RAM chips for PCs and mobile devices.
Those two markets are approaching cyclical peaks as supplies gradually outweigh market demand. However, Cypress produces NOR Flash, NAND Flash, SRAM, nvSRAM, and F-RAM chips for embedded systems like industrial machines and connected cars.
Cypress relies on content share gains in those markets, rather than raw pricing power, as machines become more complex and require more chips. In a previous investor presentation, Cypress noted that a “basic” vehicle contains about $300 worth of chips today, but higher-end connected cars require about $1,000 in chips.
Cypress is the market leader in the NOR and SRAM markets, which gives it better pricing power than mainstream memory chipmakers like Samsung or Micron. It’s also the market leader in…
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