- Shares of RF products manufacturer, Qorvo, have been selling off after Micron issued light guidance during its latest quarterly report.
- Qorvo, however, has no exposure to the highly cyclical PC industry and is therefore being unjustly punished
- Qorvo's outlook remains favorable and its shares are a good long-term investment
The semiconductor chip sector has been selling off badly after Micron (NASDAQ:MU) reported third quarter results that missed expectations and also issued a soft guidance citing weak PC demand, DRAM price pressure and ongoing product transitions. The Philadelphia Semi Index (SOX), though still 2% in the green YTD thanks to a wave of industry M&As, is now down 7% from its June 1 Peak. While the selloff is justified for chip makers with large PC exposures such as Intel (NASDAQ: INTC), Advanced Micro Devices (NASDAQ:AMD) and Nvidia (NASDAQ:NVDA), a few chip manufactures with minimal exposure to the highly cyclical PC industry have been caught in the cross-fire. One of these is Qorvo Inc. (NASDAQ: QRVO) a leading provider of core technologies and RF solutions for mobile, infrastructure and aerospace/defense applications. Qorvo Stock price is down 6% since Micron reported its awful quarterly results. Qorvo was formed following the merger between RF Micro Devices and TriQuint, and started trading as Qorvo Inc. in January 2015.
Qorvo’s selloff appears to be nothing more than an overreaction, more like throwing the bay out with the bath water. Qorvo shares are still up 16% YTD even after the recent selloff.
4G LTE Explosion
Qorvo has been a big beneficiary of explosive demand for mobile data and huge growth in data traffic. The company reported its fourth quarter fiscal 2015 results in May. Revenues jumped 46% to $634.9 million. Though the company posted a $102.5 million operating loss, this can be chalked up to $250 million merger-related charges. With the rapid adoption of LTE technologies, Qorvo is likely to continue seeing swelling top and bottom lines. Qorvo says that 4G smartphones have $13.25 of RF content per device compared to just $0.55 per device for 2G phones.
Source: RF Micro Devices
Meanwhile, 4G/LTE adoption is taking place at an even faster rate than the transition from 2G to 3G. This is partly because more people have become aware of the obvious advantages of superior data transfer and download rates than before and partly because 4G/LTE offers a better value proposition since the performance gap between 4G LTE/3G is even greater than that between 3G/2G. Nevertheless, there is still plenty of room to run. Global 4G/LTE penetration in 2015 is pegged at around 5% but will be expected to reach 25% by 2020. Global 3G/4G connections in 2014 were pegged at just 39% of total mobile phone activations but are expected to reach 69% by 2010, implying a 10% CAGR in number of 3G/4G connections. This seems to concur well with Qorvo’s projections that the $10 billion RF market will grow by 10%-15% through 2020.
Source: RF Micro Devices
Looking at the historical trends of a company like RF Micro Devices, it appears as if the company did not benefit a lot by the transition from 2G to 3G. The company’s operating margins have remained relatively unchanged since 2005 when 3G technology hit the market, while annual revenue growth rate has remained stuck in the low single digits.
I believe that this was partly caused by low demand for high-performance RF components and partly because the two companies had very limited market share in RF filters. Filter components consists roughly half of RF content in a smartphone. It’s not until recently that RFMD started seeing a significant uptick in its filter market share. Qorvo’s BAW filters have been doing well and have helped it steal some market share from Avago (NASDAQ:AVGO), whose FBAR technology dominates the industry and has helped it capture 70% of the market. Qorvo’s new high-performance filters should help it continue grabbing more filter market share, which is good news for the company since filter components account for 45% of a smartphone’s RF content in a 2G smartphone but 55% in a 4G smartphone.
Qorvo is one of the semiconductor chip manufacturers that have been punished unfairly after Micron’s fiasco. The company appears well positioned to benefit from the global transition to 3G/4G, while its bigger presence in the lucrative filter market should help. Although Qorvo might be hard put to sustain the mid-40 percentage top line growth it recorded during the last quarter, it should be comfortable growing in the mid-20s percentages over the next 3-4 years which can easily support a 15%-20% CAGR in share price over the period. Investors should use the recent selloff as a buying opportunity.