Semiconductor player, Qorvo (QRVO) has seen its share of challenges in 2020. With revenues majorly exposed to the struggling smartphone market, the company was forced to reduce its fourth-quarter guidance in March 2020. Qorvo landed up reducing fourth-quarter revenue outlook from $800-840 million to $770 million.
But investors were up for a treat when the actual fourth-quarter revenue performance reported was $787.77 million, 15.70% YoY growth, and ahead of the consensus by $18.39 million. The company’s fourth-quarter non-GAAP EPS of $1.57 also managed to beat the consensus by $0.21. Although the overall demand for smartphones has declined, the company seems to be benefitting from the 5G rollout and associated increase of data content. The company is also seeing strength in its infrastructure business with increasing adoption of GaN technology in the defense sector. Subsequently, the company has guided for first-quarter revenues in the range of $710-750 million. Although YoY decline of 6% at the midpoint, this guidance is ahead of the consensus estimate of $710 million.
Despite the ongoing recession, the tech sector has seen one of the most spectacular rallies ever. However, Qorvo has not kept pace and is currently down by 6.86% YTD. While the company’s PE multiple of 38.51x does not seem too low, its forward PE multiple of 15.41x and PS multiple of 3.88x make it an attractive pick in this otherwise overheated sector.
Increasing adoption of 5G and cellular IoT is playing out in favor of Qorvo
In the fourth quarter, Qorvo’s mobile product revenues were around $556 million or 70% of the company’s total revenues. Qorvo has estimated a 10% YoY decline in overall smartphone demand for the calendar year 2020. This will definitely impact the company’s sale of RF solutions to various handset manufacturers.
However, Qorvo remains confident about demand for 5G smartphones especially since it supplies RF solutions to Samsung (OTC:SSNLF), Xiaomi (XI), and Vivo, the leading smartphone players in the world. Qorvo also noted a robust increase in design wins in the fourth quarter, which implies that more manufacturers may start using its solutions for their 5G products.
Besides, the company also expects demand for LTE (long-term evolution), a 4G technology, to continue in the coming quarters. These trends are expected to drive the demand for Qorvo’s highly integrated and high-performance 5G and LTE-Advanced Pro Solutions including mid-high-band and ultra-high-band 5G solutions, WiFi front-end module, switches, and tuners.
The company is also benefitting from the increasing dollar content of semiconductors across all types of mobile devices, be it 5G or advanced 4G smartphones. Qorvo is seeing a $5-7 increase in dollar content gains, which, in turn, is expanding the total addressable market. 5G smartphones are associated with higher content gains, thanks to stricter filtering requirements, additional frequency bands, and dual connect scenarios for simultaneous 4G and 5G compatibility.
Qorvo also expects to benefit from its broad presence in the cellular IoT (Internet of things) segment, as demand for services such as data analytics, remote management, and system-level optimization continues to grow. The company offers a broad portfolio of RF solutions and has partnered with Nordic Semi to cater to high-volume businesses such as Cat-M and narrowband IoT applications. Finally, increasing adoption of Context-Aware Applications in smartphones, IoT devices, and the automotive sector has also led to a rising demand for Qorvo’s solutions in areas such as proximity awareness and wireless security.
Qorvo further bolstered its capabilities by acquiring Decawave in February 2020. This deal added the latter’s industry-leading ultra-wide-band solutions for mobile, automotive, and IoT applications. Finally, Qorvo also expects WiFi 6 chip-on-board market to emerge as a major opportunity in the coming years.
Although the U.S.-China trade war remains a major concern for Qorvo, we need to remember that the company is one of the five key global players in the RFFE (Radio Frequency Front-End) semiconductor market which together accounts for 85% of the total content. The remaining four include Broadcom (NASDAQ:AVGO), Qualcomm (NASDAQ:QCOM), Skyworks (NASDAQ:SWKS), and Murata (OTCPK:MRAAF), with the first three again being U.S.-based companies. While Huawei-branded RF solutions may start grabbing market share in China from Qorvo, it may take quite some time. Huawei will have to come abreast of the knowledge level of these suppliers, which is earned over many years. Further, Huawei will also require to invest heavily in fabrication and designing capabilities, which is no small feat.
Qorvo’s infrastructure business is the biggest growth driver for the company in 2020
In the fourth quarter, Qorvo’s IDP (infrastructure and defense products) business accounted for 30% of the company’s total revenues. According to ResearchAndMarkets, the global 5G Infrastructure market is estimated to grow at a CAGR of 28.97% from $12.6 billion in 2020 to $44.9 billion in 2025. Despite the 2025 projection being reduced by 22.79% as compared to the previous estimates to account for the impact of the pandemic, the market nevertheless remains a very attractive opportunity for semiconductor players.
Increasing adoption of GaN (Gallium Nitride) technology instead of LDMOS (laterally-diffused metal-oxide-semiconductor) technology for base stations in 5G and sub-6 gigahertz space is a big growth driver for Qorvo. Currently, the company is ramping up the supply of GaN technology and small-signal components to various Chinese customers who are involved in the deployment of over 0.5 million base stations in the country.
The release of WiFi 6 standards for faster connectivity has also helped drive demand for Qorvo’s compatible front-end modules and BAW (Bulk Acoustic Wave) filters. The demand has been especially pronounced on the retail side, thanks to the rapid proliferation of the work-from-home economy. Increasingly, service providers are also adopting WiFi 6 and distributed technology. The company further expects WiFi 6E to emerge as another major demand driver for the company’s products in the coming years.
Investors should consider these risks
The calendar year 2020 has proved challenging for the semiconductor industry and Qorvo has not been an exception. The pandemic disrupted the company’s supply chain. However, the company has managed to bring back much of its operations to a normal level.
While this problem is mostly resolved, the disruption of economic activity and a decline in smartphone sales remain a grim challenge. According to Strategy Analytics, smartphone sales declined 17% YoY from 330.4 million units in Q1 2019 to 274.8 million in Q1 2020.
A much bigger problem for the semiconductor industry has been posed by the escalating U.S.-China trade tensions. Federal Communications Commission has labeled Chinese telecom players, Huawei and ZTE, as national security threats for the U.S. communications network. Subsequently, telecom providers in the country will not have access to the $8.3 billion Universal Service Fund for purchasing equipment from these companies.
Although Qorvo had a revenue exposure of around 15% to Huawei in fiscal 2019, it was reduced to 10% in fiscal 2020 and below 5% in the fourth quarter of fiscal 2020. The company had already projected this revenue exposure to be less than 5% for fiscal 2021. Most of these revenues are earned from the mobile products business, while there has been hardly any exposure in the infrastructure business. Hence, although not a favorable turn of affairs, the company’s revenues will remain mostly unscathed in case of a complete loss of Huawei business. Further, a disrupted supply chain is also expected to cause Huawei to lose some market share to other handset manufacturers such as Vivo, Oppo, Apple (AAPL), Xiaomi, and Samsung. Qorvo expects some traction from these manufacturers in the coming quarters.
Going beyond Huawei, Qorvo may face challenges related to shipping products to other Chinese customers. The possibility Chinese customers having built up huge inventories of supplies in the last year can also impact Qorvo’s revenues in fiscal 2021. Finally, Chinese customers may also start looking out for Asian suppliers to reduce reliance on the U.S. semiconductor players. There also remains a chance of retaliation from the Chinese government, which can severely curtail Qorvo’s role in the 5G infrastructure deployment in China.
Japanese semiconductor player, Murata, poses a big competitive threat to Qorvo, as it has both capabilities and scale to serve Chinese smartphone manufacturers.
Qorvo also faces significant business concentration risk and credit risk, considering that it earns over 30% of revenues from Apple. The significant decline in the sale of smartphones coupled with the delay in the launch of Apple’s 5G products can prove to be a headwind for the company.
What price is right here?
According to finviz, the 12-month consensus target price for the company is $119.26. I believe that the company’s current valuation is low considering the 5G opportunity, anticipated improvement in smartphone demand in the second half of 2020, and limited exposure to Huawei. I believe that the target price of $130 is a better reflection of this semiconductor player’s potential in the next 12 months.
At end of March 28, 2020, Qorvo had cash and an untapped revolver worth $750 million on its balance sheet. The company’s free cash flow in the fourth quarter was $179 million, while that for the whole fiscal year 2020 was $780 million or 24% of the annual sales. There are no near-term debt maturities, while the weighted average maturity of outstanding debt is June 2027.
Recently, many analysts have turned optimistic about the company. On June 16, Morgan Stanley analyst Craig Hettenbach upgraded the company’s rating to Overweight from Equal Weight and raised target price to $130 from $91. On June 15, Cowen analyst Karl Ackerman raised the target price to $120 from $115 and reiterated an Outperform rating. On May 8, Craig-Hallum analyst Anthony Stoss raised target price to $120 from $100 and reiterated a Buy rating.
While the COVID-19 pandemic and escalating U.S.-China tensions present challenges for Qorvo, the company is definitely positioned to benefit from the ongoing ramp-up of 5G and WiFi 6 in the long run. Investing in Qorvo, however, requires patience. Hence, the stock can prove to be an attractive pick for retail investors with above-average risk appetite and investment horizon of at least a year.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Source: Seeking Alpha