Infineon Scoops Up Cypress

Follow the markets long enough and you'll encounter a few moments that make you think the market is both sentient and messing with you - to that end, Cypress (CY) was on my to-do list today and then I woke up to the news that Infineon (OTCQX:IFNNY) and Cypress had agreed to a $10B buyout. While Cypress shares had done well since my last (bullish) article on the company in early January, this deal is certainly a nice capper on that share price move.

All in all, I think this is a reasonable deal for both parties. While Infineon is paying a rich-looking premium based on current margins, 2019 is likely to be an anomaly that doesn't reflect the real strength of the business. Moreover, I think the financial and operation synergy potentials are significant, and I believe Cypress's MCU and connectivity technologies will be valuable additions to Infineon's portfolio. For Cypress, while the company's growth plan could well have improved the business to a point where it would get this sort of valuation down the line, this deal takes execution risk off the table and gives shareholders a very fair multiple for the business.

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Infineon Scoops Up Cypress

Marvell Executing On A Once-Underappreciated Transformation Strategy

I liked Marvell (MRVL) back in September of 2018, as I thought the Street was too focused on the near-term challenges of integrating Cavium and not enough credit to the transformation underway in the business. While the shares dropped another 20% from that point in time with the SOX, the shares have since rebounded more strongly, and the shares now sit about 20% higher than they were at the time of the last article (while the SOX is down about 4%).

I continue to like the direction Marvell is going. Significant wins in 5G (primarily with Samsung) could translate into more than $700 million of incremental revenue, and the company has been building up its ASIC capabilities such that I believe the company has a chance of emerging as a viable second-source rival to Broadcom (AVGO) in time and shifting more of the business’s center of gravity towards growth markets and away from storage.

What I don’t like so much is the current valuation. Marvell has attractive end-market exposure for the next 12-18 months and looks better-positioned for the near-term growth that Wall Street loves so much, but I think the valuation is a tougher sell now.

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Marvell Executing On A Once-Underappreciated Transformation Strategy

With Apple No Longer An Overhang, Dialog Needs To Build Its Future Business

I thought Dialog (OTCPK:DLGNF) (DLGS.XE) was undervalued back in January on ongoing uncertainty over the company’s relationship with Apple (AAPL) in power management chips and what the future of Dialog would look like. Since then, the shares have shot up about 50% as investors have come to a more rational set of expectations regarding the ongoing contributions of sub-PMIC sales to Apple and emerging opportunities in connectivity and charger products.

I do like Dialog’s emerging portfolio in low-power connectivity, a key enabling technology for IoT, and I like the amount of capital management has on hand to deploy toward more business-building deals. Management has been disciplined here so far, and I hope that will continue. Now, though, the shares are valued much more like any other semiconductor company, and while I don’t think the valuation is inflated, I also don’t see a big discount to underlying fair value.

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With Apple No Longer An Overhang, Dialog Needs To Build Its Future Business

Dialog Has Managed The Apple Situation Well, But Considerable Uncertainty Remains For What's Next

For a company that relies upon Apple (AAPL) for about three-quarters of its revenue, and has acknowledged that Apple will be switching to insourced options for more than half of that relatively soon, I believe Dialog Semiconductor’s (OTCPK:DLGNF) (DLGS.XE) executive team has managed the ensuing chaos about as well as you could reasonably ask. An IP/asset transfer and revenue-prepay deal de-risks the next few years and gives more clarity on what the new Dialog may look like, and a cash-rich balance sheet gives management M&A options while also funding a decent-sized buyback.

There’s a lot that Dialog still has to figure out. Still, this is a company that should have a non-Apple business with over $500 million in revenue in 2020, growing at a double-digit rate and supporting operating margins at least in the mid-to-high teens. If the company can find a value-building M&A transaction or two (and that’s a bigger-than-normal “if” with this company), there’s a real chance that Dialog 2.0 could be an interesting company. Valuation is more complicated now, but I do still see some upside in the shares, though I’d note that there are a lot of decent bargains in the chip space that don’t have this level of drama or uncertainty.

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Dialog Has Managed The Apple Situation Well, But Considerable Uncertainty Remains For What's Next