Qualcomm-NXP Deal Proving That The Internet Of Things Has Reached An Inflection Point

QUALCOMM, Inc.'s QCOM proposed $110 per share offer to acquire NXP Semiconductors NV NXPI serves as a sign that the Internet of Things has reached an inflection point, at least according to Craig Hettenbach of Morgan Stanley.

In a report on Friday, Hettenbach noted that the $47 billion proposed acquisition is the largest to date in the semiconductor industry and comes at a time when the Internet of Things segment is "moving from hype to reality."

Hettenbach turned positive on NXP Semiconductors' stock last October and re-instated coverage of the company with an Overweight rating and $115 price target. In his latest report, the analyst reaffirmed his positive view on NXP Semiconductors given the margin expansion potential through its acquisition of Freescale and its strong positioning in the auto market an IoT.

A Fortune report noted that the acquisition would give Qualcomm back some of the lost chip business it lost from Apple Inc.'s AAPL iPhone 7 as NXP Semiconductors' sensor an payment chips are included in the iPhone 7.

However, the analyst downgraded NXP Semiconductor's stock to Equal-Weight as the stock's near-term performance will be mostly influenced by the Qualcomm deal. The price target was also raised to $110 from $109 to reflect the price tag on the pending merger.

Commenting on the proposed acquisition, Hettenbach stated the deal represents a 16.5x multiple to his prior 2017 MW EPS estimate of $6.68. On an EV to EBITDA and EV/S basis, the deal comes out to 14x and 4.6x 2017 sales.

Finally, the analyst stated that the initial feedback he received from investors is that the $110 takeout offer is "underwhelming" and it's possible another bidder could present themselves. Nevertheless, Qualcomm could be best positioned to leverage its balance sheet and acquire NXP Semiconductors given its $31 billion cash hoard and just $11.8 billion in debt.