Qorvo Still Not Getting All The Love It Should

 

More than six months have passed since my last write-up on Qorvo (QRVO), and this remains a frustrating stock. The shares have modestly underperformed the S&P 500, outperformed the NASDAQ, more or less kept pace with the SOX, and outperformed other well-known chip companies with meaningful smartphone front-end exposure (like Broadcom (AVGO), Qualcomm (QCOM), and Skyworks (SWKS), but I still find the performance to be less than the fundamentals should merit.

I get that there is less bullishness about smartphones now than in past cycles, but I think that overlooks the content and unit growth leverage that Qorvo has, as this company has been gaining share outside the Apple (AAPL) ecosystem. I also understand some of the short-term frustrations with the Infrastructure business, but I think the long-term outlook remains attractive. All in all, I see the potential for double-digit annualized total returns from here, and it looks attractively priced in a sector that doesn't have many of those opportunities.

 

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Qorvo Still Not Getting All The Love It Should

Qorvo Still Undervalued On 5G Volumes And Content Growth Opportunities

It’s been too long since I’ve written on Qorvo (QRVO). I liked the stock back in May of 2019 on the company’s opportunity to benefit from 5G-driven demand for RF front-end components, the underrated IDP segment, and further margin progress. Since then, the shares have risen over 130%, beating the NASDAQ and SOX indexes by wide margins, as well as peers/rivals like Qualcomm (QCOM) and Skyworks (SWKS), though the gap with Skyworks has been much closer of late. Qorvo has also beaten Broadcom (AVGO) by a wide margin, though with that company’s mix, the comparisons aren’t as relevant as they once were.

Hard as it is for me to believe in a market where seemingly every chip stock looks well-valued, Qorvo doesn’t look too expensive here. In fact, I think there’s a reasonable argument that it’s undervalued given low 30%’s operating margins and a revenue growth rate in the low-to-mid teens over the next few years. While there are near-term risks like an inventory correction in the smartphone channel to at least consider, this name is still worth a look.

 

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Qorvo Still Undervalued On 5G Volumes And Content Growth Opportunities

Qorvo Still Not Getting Its Due

When I last wrote about Qorvo (QRVO) in early January, I thought the shares of this chip company were undervalued, but I thought the near-term outlook was clouded by the possibility of another guidance cut (which happened with fiscal Q3 earnings in February) and a lingering perception of Qorvo as a “problem child” with respect to overreliance on mobile end-markets and problematic gross margins. To that latter point, the shares have continued to consistently lag the SOX since that last article, though they’re up about 20%.

Generating alpha by investing in laggards is a tough way to go, but it is not without its rewards. Once a company’s perception changes, the rerating can be quick and significant. While Qorvo seems to have lost content with Apple (AAPL) (back to Broadcom (AVGO), presumably), I think the IDP segment is under-appreciated, and I likewise think the gains with non-Apple vendors are underappreciated for their margin benefits. It doesn’t take heroic assumptions to get a high $80’s fair value, but this is a stock that has tested investor patience for some time and we may not be out of the woods yet with this sector correction.

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Qorvo Still Not Getting Its Due

Between Weak iPhones And Ongoing Margin Challenges, Qorvo Can't Catch A Break

I’m sure some Qorvo (QRVO) shareholders will take exception with this, but more and more this company is reminding me of that kid we all know from high school who was uncommonly talented but somehow just never managed to put it together. Management certainly bears some responsibility (particularly for the ongoing challenges in hitting margin targets), but other issues outside of their control like weak iPhone unit sales have undermined some of the positive drivers.

Qorvo shares look undervalued by most metrics I track, but I think it is fair to ask if revenue and margin leverage expectations are still too high, particularly as high-end handsets don’t seem to offer the growth they once did. There are still credible drivers in markets like IoT, wireless infrastructure, and even handsets, but I’d like to see at least another quarter before stepping up and buying these beaten-down shares.

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Between Weak iPhones And Ongoing Margin Challenges, Qorvo Can't Catch A Break

Subtracting Clarity Won't Make The Broadcom Case Stronger

Operationally, I can’t really find much to criticize in Broadcom’s (AVGO) fiscal fourth quarter, even if it does look like the wireless business is looking a little weaker heading into the next year. The central debate on Broadcom remains the CA acquisition and whether this foray into enterprise software can and will generate attractive returns for shareholders. The jury is still very much out on that, though management has made it clear that they look at this as a margin/FCF-rich opportunity and that they’re already willing to consider other enterprise software deals.

As I’ll discuss later, I think Broadcom’s move away from greater transparency is a mistake and disrespectful to shareholders, but it doesn’t really change the intrinsic value. Between a chillier market for semiconductor stocks and ongoing concerns about the CA deal, Broadcom continues to look undervalued below $300.

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Subtracting Clarity Won't Make The Broadcom Case Stronger

Akoustis Technologies Is A Puzzling Pre-Commercial Tech Story

It may not always be the case that if something seems to good to be true it probably isn’t, but healthy skepticism can be an investor’s best friend. To that end, Akoustis (AKTS) is both intriguing and confounding. While the idea of disruptive technology in the RF filter space is certainly appealing, particularly with an enterprise value of less than $200 million, I think you have to ask why a company with promising technology and no revenue would go public through a reverse merger instead of following the more typical venture-IPO route.

I don’t know whether the worst accusations against Akoustis are true, but I do know that a lot of what they’re attempting to do flies in the face of how business normally works, and I know competition in advanced filters is extremely fierce. It’s true that Akoustis is targeting markets that can support meaningful revenue, but with what I regard as unproven technology, unproven execution capabilities, significant barriers to adoption, and thin financial resources, this is at best a very risky proposition.

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Akoustis Technologies Is A Puzzling Pre-Commercial Tech Story

Broadcom Beats, But Rebuilding Confidence Takes Time

Short of repudiating the CA (CA) acquisition and announcing a huge buyback, there’s really not much Broadcom (AVGO) could have done with its fiscal third quarter results that would restore enthusiasm for the shares back to its pre-deal announcement levels. And frankly, I’m not sure that would have done it either, as the shares had been trending down since late November anyway.

There are still a lot of positives to the Broadcom story, including a very strong market position in switch silicon, underrated (still) capabilities in heavy-duty AI ASICs, and cash-generating businesses in areas like networking ASICs and enterprise storage. Add in a possibly improving Wireless business and an undemanding valuation, and I believe Broadcom shares still have a lot of appeal. Set against that appeal are the concerns about Broadcom going too far out of its area of expertise with the CA deal and a wider slowdown in the chip space.

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Broadcom Beats, But Rebuilding Confidence Takes Time

Qorvo In A Tricky Spot Between Opportunity And Execution

One of the most frustrating investment situations to be in is when a company has exciting potential and large market opportunities but just can't marry that to sustained execution. It's been a while since I've written publicly on Qorvo (QRVO), but inconsistent execution was an issue in late 2016 and it remains an issue today, even though there are a lot of legitimate positive points to this story.

Winning business from Apple (AAPL) that was previously Broadcom's (AVGO) domain was a coup, and I like the company's strong position in GaN semiconductors as well as the growth opportunities in the IDP business. I don't like the disappointing, inconsistent, "it's always something" track record with gross margins, and it's a significant impediment to Qorvo realizing its full potential. Even so, I'm intrigued by the potential value here and I think the stock price may be underpinned by a sense of "if they won't fix it… somebody else will" M&A leverage.

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Qorvo In A Tricky Spot Between Opportunity And Execution

Broadcom Shares On Pause, But The Business Isn't

I expected some turbulence at Broadcom (AVGO) when I last wrote about the company, and that has indeed been the case, but the shares have held up reasonably well. While the SOX index is pretty much flat since the time of my last article on Broadcom, the company's shares are up close to 5% - more or less keeping pace with the Nasdaq (although the trailing one-year comparisons are much worse). Although the market has been concerned about the company's wireless business, with weak unit volumes at Apple (AAPL) and some share loss to Qorvo (QRVO), the company's wired business is still in fine shape and will likely accelerate as 2018 moves on. I continue to believe that Broadcom is among the better bargains in a sector where most of the cheaper-looking names are "scratch and dent" merchandise with some operational issues.

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Broadcom Shares On Pause, But The Business Isn't

Execution And Opportunity Continue To Drive Broadcom

Broadcom's (NASDAQ:AVGO) recent stock market performance hasn't been all that special. Since my last update on this leading chip company, the shares have done a little better than the NASDAQ, but have lagged the SOX pretty meaningfully, not to mention lagging other notables like Qualcomm (NASDAQ:QCOM), Texas Instruments (NYSE:TXN), and Intel (NASDAQ:INTC).

I'm not worried. Sure, as a Broadcom shareholder I'd love to see the stock performing better, but the company's financial reports have been positive and I believe there are strong tailwinds for both the wireless and wired businesses. Uncertainty around M&A is a risk factor, as are general market/economic conditions and competition, but I believe Broadcom has the quality to be a long-term holding and the valuation today isn't bad.

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Execution And Opportunity Continue To Drive Broadcom

Qorvo Still A Few Ducks Short Of A Nice Row

For a chip company like Qorvo (NASDAQ:QRVO), there's an ongoing need to pair attractive revenue growth with strong margins as both loom large in chip stock valuation. Recently Qorvo has done well shoring up the prospects for the first half, as content wins with Apple (NASDAQ:AAPL) and ongoing share growth with Chinese handset makers are making a good case for mobile revenue growth. What's more, wireless infrastructure seems to be rebounding nicely off a recent bottom.

But Qorvo still doesn't have all of its ducks in a row. Gross margin has disappointed recently and management's guidance was not particularly encouraging - dredging up past margin concerns and limited the enthusiasm over share-driven revenue growth. Healthy margins can justify a fair value in the $60s today, but I don't consider management execution to be a given here like I do with Broadcom (NASDAQ:AVGO), and there are risks that rivals like Skyworks (NASDAQ:SWKS) and Qualcomm (NASDAQ:QCOM) will ultimately squeeze a little harder in the future.

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Qorvo Still A Few Ducks Short Of A Nice Row

Seeking Alpha: Excellence Rewarded With Avago

I've been pretty bullish on both Avago and Broadcom (NASDAQ:AVGO) over the years and now that the merger is completed, nothing about this combination has really changed my mind. If anything, watching Avago's management more closely has led me to a greater appreciation of how they see the semiconductor world differently than most and how that informs their management choices. At an overly simplified level, this isn't a company that believes that success will come from pursuing growth for its own sake, but rather that strong margins generated by businesses with meaningful competitive advantages is the real key.

I continue to believe that fair value for the new Broadcom is in the neighborhood of $170, but that there could be some upside to the long-term underlying growth rate of around 5%. As a diversified chip company with tremendous scale and 40%-plus market share in multiple markets, I think Broadcom can still be thought of as a core tech holding, but it may be better to try to add shares when the enthusiasm cools a bit.

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Excellence Rewarded With Avago

Seeking Alpha: Qorvo Still Tied To Apple's Fortunes, And Now Intel's As Well?

Qorvo (NASDAQ:QRVO) isn't quite a pure-play on high-performance RF chips in handsets, as the company's Infrastructure and Defense Products (or IDP) kicks in about 20% of the company's revenue, but it is close. That didn't work in the company's favor in 2015, as a slowing Chinese smartphone market and issues with top customer Apple (NASDAQ:AAPL) (more than 40% of revenue) led to multiple reductions in guidance and a substantial reduction in the share price - the stock is down close to 40% over the past year and down a similar amount since my last article on the company. Even allowing that many chip companies that depend upon the smartphone space have had their struggles (including Skyworks (NASDAQ:SWKS), Qualcomm (NASDAQ:QCOM), and Cirrus (NASDAQ:CRUS)), Qorvo has stood out as a weak performer.

Valuation seems tricky here. On the positive side, it looks as though the company has a meaningful opportunity to benefit from Intel's (NASDAQ:INTC) participation in the Apple iPhone 7, as Qorvo could generate meaningfully higher content in those phones, mid single-digit revenue growth after FY2016 would seem to support a fair value above $60, and the company has good share in segments like PA modules and switches. On the other hand, Skyworks and Broadcom (NASDAQ:AVGO) are tough rivals, the company needs to do better outside of Apple, and the Intel-related benefits are hardly certain.

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Qorvo Still Tied To Apple's Fortunes, And Now Intel's As Well?

Seeking Alpha: Qorvo Hoping To Show One Plus One Is More Than Two

The smartphone space is a weird place these days. On one hand, there are worries that the best days of growth in the high end are already past. On the other hand, companies like Qorvo (NASDAQ:QRVO) and Avago (NASDAQ:AVGO) are looking at a world that still has a lot of room to adopt LTE handsets, each one of which offers richer switch, amplifier, and filter content.

I fully expect that Qorvo will eventually have to contend with lower-cost China-based RF component manufacturers, just as Qualcomm (NASDAQ:QCOM) has had to contend with lower-cost players in baseband, but I don't believe that cancels out the opportunity. Mid-to-high single-digit long-term revenue growth coupled with FCF margins in the 20%'s can support a fair value in the high $80's and I wouldn't rule out the possibility of Qorvo gaining share and/or exceeding its cost synergy targets.

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Qorvo Hoping To Show One Plus One Is More Than Two

Seeking Alpha: Broadcom - Should I Stay Or Should I Go Now?

Broadcom (NASDAQ:BRCM) shareholders have generally given more thought to the risk that management would resume its acquisitive ways and fritter away value than the notion that Broadcom itself would be an M&A target. Considering that Broadcom is the fifth-largest publicly-traded chip company and the founders own sizable stakes, I don't believe a takeover was really on the radar as a probable event.

Now that's all moot. I had speculated that Avago (NASDAQ:AVGO) would return to M&A soon, but I hadn't expected a bid for Broadcom. That's what has happened, though, and so now it is time for this Broadcom shareholder to start figuring out if it is time to cash in what has been a good call/investment, or whether the combined entity has enough promise to merit taking and holding the shares of the new Avago.

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Broadcom - Should I Stay Or Should I Go Now?

Seeking Alpha: Will Avago Be A Rock In A Turbulent Semiconductor Sea?

Avago (NASDAQ:AVGO) is a great example of something that even after all these years in the markets still challenges me - knowing when to say "enough" on a winning stock and knowing when you're talking about a truly great growth story. I was worried about the valuation on Avago last summer, but the shares have risen another 85% since then. That makes that cautious stance a pretty terrible call in hindsight.

Looking ahead, I can't completely dismiss my concerns about valuation, but this is a company with strong margins and multiple growth drivers. What's more, it's a company with a clear operating plan in place and a strong sense of what it wants out of M&A - both of which can generate substantially more value in the future. I'm not expecting another double from Avago over the next year, but I think the company's growth opportunities and M&A options are strong positives in its favor.

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Will Avago Be A Rock In A Turbulent Semiconductor Sea?