Cypress Can Ride Surging Demand for Nintendo’s ‘Switch,’ Says Needham
Cypress Semi makes $5.50 for every Nintendo "Switch" game machine sold, notes Needham's Rajvindra Gill, and so surging demand, and production, of the device bodes well for Cypress's outlook.
By Tiernan Ray
Updated Oct. 9, 2017 11:20 a.m. ET
Shares of chip maker Cypress Semiconductor ( CY) are up 7 cents, or half a percent, at $15.58, after Needham & Co.’s Rajvindra Gill said rising expectations for Nintendo’s ( NTDOY) “Switch” video console, which Cypress supplies.
Gill takes his cue from a report last week by DigiTimes’s Aaron Lee and Joseph Tsai claiming that Nintendo has increased its production rate of the Switch as it remains supply-constrained in Japan and other markets.
The authors wrote that Nintendo "has recently raised its orders for the Nintendo Switch to two million units a month because of the product's surging demand,” and that it will ship 20 million units this year, citing multiple unnamed sources.
Gill, who has a Buy rating on Cypress stock, and a $20 price target, notes that Cypress makes $5.50 off each Switch unit, and every 10 million units adds $55 million to the company’s revenue, and 2 cents to 3 cents per share in net income.
He thinks Nintendo’s going to beat that 20 million-unit target. He also thinks next year, Switch sales could reach 25 million, including potentially sales into mainland China.
More important for the moment, Nintendo’s rising production means "We could possibly see demand get pulled into 4Q17 from 1Q18 to support the growing sell-through forecasts” for the switch.
That could boost Cypress’s Q4 results, he thinks. "We have overall revenue down 4% Q/Q in 4Q,” for Cypress, writes Gill, "and Nintendo sales specifically down 16%,” but, “We could possibly see Nintendo sales flat to up Q/Q in 4Q17."