NXP Semiconductors (NXPI Quick QuoteNXPI - Free Report) shares have lost 9% in the past three months, underperforming the broader Zacks Computer and Technology sector and the S&P 500’s return of 9.8% and 6.7%, respectively. NXP Semiconductors also lagged behind leading players in the semiconductor space, including Semtech (SMTC Quick QuoteSMTC - Free Report) , MACOM Technology Solutions (MTSI Quick QuoteMTSI - Free Report) and Analog Devices (ADI Quick QuoteADI - Free Report) over the same time frame.

In the past three months, shares of SMTC and MTSI have returned 36.8% and 28.2%, respectively, while ADI has lost 8.4%.

This underperformance can be attributable to NXP Semiconductor’s dismal third-quarter 2024 results wherein revenues and non-GAAP EPS declined 5.4% and 7%, respectively. The company’s latest quarterly results were hurt by the continued weakness in the automotive end market due to high-level inventory corrections among direct Tier 1 customers. Slowing momentum in the communications infrastructure end market due to broad-based inventory corrections also negatively impacted overall financial performance.

Despite continued weakness across multiple end markets, NXP Semiconductors is continuously focusing on expanding its portfolio through innovation or acquisitions. The company recently announced that it has entered into a definitive agreement to acquire Aviva Links in an all-cash transaction valued at $242.5 million. This strategic acquisition highlights NXPI’s commitment to bolstering its automotive networking solutions, particularly for advanced driver-assistance systems (ADAS) and in-vehicle infotainment (IVI) applications.

Aviva to Strengthen NXPI’s Automotive Networking Portfolio

The automotive industry is rapidly transitioning toward software-defined vehicles that demand robust, interoperable networking solutions. Aviva Links specializes in Automotive SerDes Alliance (ASA)-compliant in-vehicle connectivity, offering highly asymmetrical links tailored to the needs of ADAS and IVI systems. These solutions enable seamless integration of high-bandwidth downstream data from cameras and displays while maintaining efficient low-bandwidth upstream communication.

With the rising adoption of digital cockpits and other in-cabin technologies, automakers are moving away from proprietary, non-standardized connectivity solutions. Aviva Links' portfolio of ASA-based multi-gigabit links, which support data rates up to 16 Gbps, addresses this gap, providing scalable and open-source networking architecture for next-generation vehicles.

The acquisition positions NXP to capitalize on a rapidly expanding market. According to NXP's market intelligence, the addressable market for ADAS and IVI asymmetrical links is projected to grow from $1 billion in 2024 to $2 billion by 2034. By integrating Aviva Links’ solutions into its portfolio, NXP aims to accelerate the adoption of open-standard ASA SerDes connections, driving market growth and reducing automakers’ reliance on proprietary technologies.

Aviva Links has already secured design wins with two major automotive OEMs and is actively sampling its solutions to additional OEMs and Tier-1 suppliers. This strong customer base will provide NXP with a competitive edge in penetrating the evolving automotive connectivity landscape.

Portfolio Expansion to Boost NXPI Prospects

NXP Semiconductor is expected to gain traction through its sustained focus on expanding its portfolio. NXP Semiconductor’s recently launched Trimension NCJ29Dx family of Ultra-Wideband (UWB) fine-ranging ICs is being implemented by Audi AG to improve smart, hands-free secure car access functionality.

By using the fine-ranging capabilities of NXP Semiconductor's vast Trimension UWB portfolio, smart, secure car access accurately determines the driver's position in relation to the vehicle, enabling the doors to be unlocked only when the driver is near the vehicle. Using a digital key on a UWB-enabled smartphone or wearable that can be kept in the driver's pocket or bag, drivers can unlock and start their car hands-free.

The launch of the new S32J family of network controllers and high-performance Ethernet switches by NXPI is a notable step. The S32J family and NXP Semiconductor's most recent S32 microcontrollers and processors can function as a single extended virtual switch since they share a common switch core, NXP NETC. The recently announced NXP CoreRide platform's common networking switch core gives OEMs more effective and reconfigurable networking options while streamlining software reuse and integration with other solutions.

ZF Friedrichshafen AG, a world leader in e-mobility, and NXP Semiconductors announced a partnership on next-generation SiC-based traction inverter solutions for electric vehicles. The advanced GD316x high-voltage isolated gate drivers from NXP are used in the solutions, which are intended to hasten the adoption of SiC and 800-V power devices.

The partnership between ZF and NXP is an important step in developing safer, more environmentally friendly and more energy-efficient electric vehicles for the future as well as speeding up the electrification of the automotive sector.

NXPI’s Q4 Guidance Highlights Near-Term Weakness

For the fourth quarter of 2024, NXP Semiconductors expects revenues to be $3.1 billion (+/- $100 million), indicating a year-over-year decline of 5-9% sequentially at the mid-point. The Zacks Consensus Estimate for fourth-quarter revenues is pegged at $3.10 billion, suggesting a year-over-year decline of 9.4%.

The non-GAAP gross margin is expected to be 57.5% (+/- 50 bps). At the midpoint, the non-GAAP operating margin is projected to be 35.1%. 

NXP Semiconductor anticipates non-GAAP earnings to be $3.13 per share. The consensus mark for the same is pinned at $3.14 per share, down by a couple of pennies over the past 30 days, suggesting a 15.4% year-over-year decline.

The Industrial and IoT end market is predicted to decline sequentially in the mid-single-digit percent range in the fourth quarter of 2024 and by 20% from the reported figure from the previous quarter. The mobile end market is expected to shrink by low single-digit percentages both year over year and sequentially. Finally, it predicts a mid-single-digit percentage decline in the Communication, Infrastructure & Other end market, both year over year and sequentially. 

In conclusion, the fourth-quarter guidance from NXPI reflects the macroeconomic weakness in Europe and North America, partially offset by strength in China. The company had anticipated a cyclical recovery in the second half of 2024, but it hasn't materialized as Tier 1 customers seem to be taking a very cautious approach to their inventory positions due to a soft and unpredictable demand environment.

Conclusion: What Should Investors Do?

Though NXP Semiconductors' long-term prospects appear promising given the strength of its portfolio and diverse clientele, caution is advised in the near term due to the ongoing macroeconomic challenges and persistent weakness across multiple end markets. The Value Style Score of D indicates that NXPI shares are not cheap. 

NXPI carries a Zacks Rank #4 (Sell), which implies new investors should stay away from the stock currently and existing investors should sell the stock. 

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.