Should You Invest in Cypress' Turnaround?

Cypress Semiconductor's performance in the past year has been disappointing as the company's stock has underperformed the NASDAQ index by a big margin. However, it seems like Cypress' turnaround strategies are gradually working; its recent first-quarter results were quite solid. In addition, the company's outlook for the second quarter was also decent with a book-to-bill ratio of 1.08.

Considering that Cypress trades near its 52-week low and has a juicy dividend yield of 4.60%, it looks like an enticing investment. However, whether or not Cypress will be able to execute its turnaround successfully remains to be seen as it faces rising competition from Synaptics . Let's take a closer look at Cypress' strategies and where it stands when compared to the competition.

Gaining some momentum
Cypress finished the quarter with an impressive order backlog. Its six-month bookings increased more than 20% from the preceding quarter with growth in all divisions. Moreover, its inventory dropped 11% from the fourth-quarter and finished goods dropped 18% sequentially. This suggests that Cypress is seeing good demand that's leading to a decline in inventory.

The company's product development is playing an important role in its turnaround. Cypress' recent addition of mechanical button replacement (MBR) chips, the HX3 USB 3.0 controller, the 72 megabits and 144 megabits TDR4 sync RAM, along with the low cost PSoC 4 offering, have strengthened its product portfolio. It plans to accelerate these design wins. The company has also expanded its distribution presence in China by adding new distribution partners.

In the first quarter, Cypress franchised five new distributors, hitting a total of more than 60 distributors in Asia. The company believes that its strong sales force and the demand for its new products will drive its results going forward. The company is seeing stronger activity in industrial, consumer appliances, wearables, and automotive. 

Design wins to drive growth
Cypress's MBR device is gaining traction as it has already replaced around 5 billion buttons. Management believes that Cypress has the best performance buttons on the market. The company is also aggressively targeting wearable devices. The Toq Smartwatch by Qualcomm and the Smartwatch 2 by Sony contain Cypress chips. These run on a microampere of current and consume less power. Moreover, they also contain Cypress' button controllers and touchscreen controllers for small screens.

Cypress' design win in Sony's smartwatch is an important one for the company. According to some reviews, Sony's smartwatch is better than rival Samsung's offering. The fact that the Sony Smartwatch 2 is compatible across Android smartphones is a big plus for it, while Samsung's Galaxy Gear is compatible only with Samsung's devices. This could help increase the adoption of the Sony smartwatch.

Sony is also preparing to launch the next generation of its smartwatch this year. As a result, the company might be ramping up production of the device, and when it does so, Cypress will see more orders.

Cypress is also focusing on product innovation by partnering with different companies. It has entered into an agreement with Carestream Advanced Materials, which uses nano-wire sensors that can make Cypress' offerings more efficient. Cypress is also working with Cima NanoTech, which has silver nanoparticle touch sensors. Essentially, Cypress is working with innovative technology companies to improve its position in the market.

A potent threat
The focus on product innovation is important for Cypress, as the company is facing stiff competition from Synaptics in touchscreen controllers. Synaptics' research and development expense has increased at almost twice the rate of Cypress' in the past five years. Synaptics is also gradually gaining more content with Samsung's high-end devices, thereby hurting Cypress' prospects. Cypress is also a Samsung supplier, but it seems that Synaptics is getting more business from the South Korean corporation if we believe Needham analysts.

Bottom line
Cypress reported some good numbers in the last quarter. The company has landed notable design wins and its order book is also quite strong. Considering Cypress' juicy dividend yield, an investment in the company's stock looks enticing. However, investors should also keep a close eye on Synaptics as it is a potent threat for Cypress.

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The article Should You Invest in Cypress' Turnaround? originally appeared on

Mukesh Baghel has no position in any stocks mentioned. The Motley Fool recommends Cypress Semiconductor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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