Cash and debt position
High profits materialize into high cash flows. Some companies spend their cash to give returns to shareholders, while other companies put it into cash reserves and invest in growth opportunities. In 2016, one of the most cash-rich semiconductor companies, Qualcomm (QCOM), used its $30 billion in cash reserves to fund the acquisition of NXP for $47 billion.
Notably, the semiconductor consolidation wave in 2015 and 2016 increased the balance sheet leverages of several companies, putting them in a net debt position, wherein long-term debt is higher than cash reserves.
But high leverage reduces a company’s financial flexibility to take up new investments and can also impact its profits during a downturn. Advanced Micro Devices’ (AMD) high leverage pushed the company into severe losses, as its profits were not sufficient to pay the high-interest expense on the debt.
Cyclical companies maintain strong net cash positions to withstand down cycles, while growth companies maintain strong net cash positions to invest in future growth opportunities.
The top cash-rich semiconductor stocks
In calendar 2Q17, TSMC (TSM) was the richest semiconductor company in terms of cash, with net cash of $18.5 billion, followed by Lam Research (LRCX) at $4.09 billion, Nvidia (NVDA) at $3.9 billion, Applied Materials (AMAT) at $1.93 billion, and Xilinx (XLNX) at $1.9 billion.
We measured these cash-rich companies after deducting their long-term debt from their cash reserves, and we excluded Samsung (SSNLF), as its core business is in mobile and consumer electronics. If we include Samsung, it tops the chart with a net cash position of $59 billion—three times more than TSMC’s net cash reserves.
When a company’s earnings are not adequately priced into its stock price, the stock is either overvalued or undervalued, creating an opportunity for long-term investors.