- Qorvo shares have been excessively punished after the company issued soft Q2 2016 guidance.
- A check at its contemporaries, however, suggests that Qorvo could have been rather conservative with its guidance.
- Qorvo has achieved significant design wins in iPhone 6S which is selling well.
- The shares look like a good buy.
The semiconductor sector has been one of the worst performing sectors this year. The popular iShares PHLX Semiconductor ETF (SOXX) is down 15.6% YTD, a performance that is only rivalled by 3D Printing Stocks-heavy, ARK Industrial Innovation ETF (NYSEARCA:ARKQ) in the tech sector, which is down 14% YTD, and United States Natural Gas Fund, LP (UNG) from the energy sector which is down 19.5% YTD. One of the badly hammered semiconductor stocks has been RF chip manufacturer, Qorvo (NASDAQ:QRVO), whose shares are down 34.34% YTD. Qorvo was formed through a merger between RF Mircro Devices and TriQuint early this year.
What makes Qorvo stock selloff outstanding, compared to other semiconductor stocks that have tanked badly is that unlike companies like SanDisk (NASDAQ:SNDK) and Micron (NASDAQ:MU) that have been recording declining sales and issuing poor outlooks, Qorvo stock's selloff began after the company delivered strong Q1 FY16 results but issued weaker-than-expected guidance. Qorvo reported first quarter sales of $673.6 million for the June quarter, good for 6% Q/Q and a healthy 23% Y/Y growth. But then Qorvo issued second quarter revenue guidance of $690M-$710M, below consensus estimates of $743.6M.
The fact that investors are not familiar with the merged company must also have contributed to the panic. But there are a couple of reasons that make Qorvo a compelling investment choice.
China Fears Overdone
Qorvo supplies RF chips for switches, tuners, and filters t o the smartphone industry. Some of its key customers include Apple (NASDAQ:AAPL), Samsung, Xiaomi, and Huawei. All these companies are major players in the Chinese smartphone industry.
Source: Technology World
One of the major reasons why Qorvo shares have sold off badly is because investors fear that the Chinese market is going to experience a big slowdown. But these fears appear overdone. Looking at Xioami’s and Huawei’s China smartphone market share gains during the second quarter, one thing becomes clear: although the overall smartphone market in China has been experiencing a slowdown, the leading players have actually been doing brisk business in the Middle Kingdom. Apple was ranked the #1 smartphone vendor in China during the first quarter; by the second quarter, Xiaomi and Huawei had pushed Apple to third spot. Mind you Apple recorded a blistering 81% Y/Y revenue growth in China during the second quarter, which clearly implies that Xiaomi and Huawei did even better business than Apple in China during the quarter.
A number of companies with heavy exposure to China have already reported their results for the September quarter. One broad conclusion that can be drawn from the results is that companies such as United Technologies (NYSE:UTX) that do business with corporates have been having a rough ride while companies such as Apple and Nike (NYSE:NKE) that do business with consumers are faring much better. Apple recently delivered record iPhone 6S sales just 3 days from the launch of the new models which alleviated fears that China would hurt the Cupertino giant. Meanwhile, Nike recently delivered robust 3Q FY 2015 results helped by way-better-than-expected sales in China.
Qorvo’s exposure to China clocks in at around 48% of its revenue, which is comparable to that by contemporary Avago Technologies (NASDAQ:AVGO) and way lower than Skyworks Solutions (NASDAQ:SWKS) which is pegged at a hefty 83%. Both companies delivered healthy quarterly results during their latest earnings reports, and went ahead to issue strong guidance. Shares of Avago are up 19% YTD while those of Skywork’s has made gains of 14%.
Recent teardowns on iPhone 6S/6S Plus have revealed significant RF content from Qorvo, as well as from Avago and Skyworks Solutions. An iPhone 6S teardown by iFixit turned up an antenna switch by RF Micro and a power amplifier module by Triquint, the two arms of Qorvo. News that iPhone 6S is racking up record sales numbers is of course great news for Qorvo. Qorvo had landed similar design wins with iPhone 6, which indicates continuing confidence by Apple in the company. Qorvo predicts that it will continue netting more RF dollars as the transition to 4G/LTE continues.
It appears as if Qorvo deliberately issued soft guidance for the current quarter so as to lower investor expectations and make it easier for the company to beat expectations. Many of its contemporaries have continued doing well in China, and there is no good reason why Qorvo’s case should be any different. The battered shares look like a good buy.