Qorvo Stock Looks Attractive Despite 2x Rally

Qorvo (NASDAQ: QRVO), a semiconductor vendor best known for supplying radio frequency (RF) components, has seen its stock rise by about 15% year-to-date and by almost 2x over the last 12 months, driven by the ongoing transition of the wireless industry to 5G technology and strong consumer electronics demand. We think Qorvo stock still looks attractive following the rally for a couple of reasons. Firstly, Qorovo trades at a relatively reasonable valuation of around 20x forward earnings. The growth outlook is also strong. The 5G upgrade cycle is likely only getting started and as 5G penetration improves, Qorvo should see significant opportunities not just from higher 5G handset volume growth, but also potentially from stronger RF content per handset. Separately, the company’s Infrastructure and Defense Products (or IDP) segment could also see some upside from the deployment of 5G base stations and demand for its GaN power amplifiers. The Biden Administrations’ ambitious broadband plan, which calls for a $100 billion investment into bringing reliable, high-speed Internet services to every American, could also help the infrastructure side of the business. Overall, Qorvo’s revenues are projected to grow by a solid 23% this year and about 10% next year, per consensus estimates. Margins also picking up. Over the most recent quarter, gross margins rose more than five points from the year-ago period to 54.4%. Moreover, Qorvo should also be somewhat insulated from the semiconductor supply crunch as the company operates its own foundry, which should enable it to meet demand, while potentially benefiting from higher pricing.

See our theme on Stocks That Benefit From The Semiconductor Shortage for a list of companies that stand to benefit from the current supply crunch in the semiconductor market.

[1/13/2021] Why Qorvo Stock’s Rally Isn’t Done Yet

Qorvo (NASDAQ: QRVO), a semiconductor vendor best known for supplying radio frequency (RF) components had a solid 2020, with its stock price rising by about 60% through the year. The stock is also up almost 3x since the end of 2018 and now trades at about $182 per share. The recent rally is driven by the ongoing transition of the wireless industry to 5G technology, with strong demand from both smartphone manufacturers and wireless base station providers. Now, are further gains in the cards for Qorvo or is the stock priced correctly for the near-term? Let’s take a look at what drove the gains in Qorvo’s stock price in recent years and what the outlook for the company could be like. See our dashboard analysis on What Has Driven Qorvo Stock’s 3x% Gain Since 2018? for a detailed overview of how Qorvo Revenues, Margins, and multiple have changed in recent years.

What Has Driven Qorvo’s Stock Price In Recent Years

Qorvo sells radio frequency (RF) solutions focused on cellular, Ultra-wideband, and Wi-Fi to manufacturers of mobile products such as smartphones, wearables, and tablets. The company also sells RF, System on Chips, and power management solutions to customers in the wireless infrastructure, defense, and automotive space. The company’s Revenues grew modestly from around $3 billion in FY’18 (fiscal years end March) to about $3.2 billion in FY’20 driven by higher demand from mobile customers such as Apple, although this was partly offset by lower demand for base station products. However, Revenues improved over the last 12 months to $3.5 billion, driven by 5G upgrade related demand. Qorvo’s Net Margin has improved consistently from negative levels in FY’18 to 12.5% over the last 12 months, as Revenues continued to expand while some fixed costs such as R&D and SG&A grew at a slower pace. Qorvo’s reported EPS also improved from around -$0.32 in 2018 to around $3.88 over the last 12 months, driven by improving earnings as well as the company’s share buybacks, which reduced its share count by about 6% over the last 2 years. Qorvo’s P/E multiple has also expanded modestly, rising from about 57x in 2018 to about 64x currently (based on trailing 12-month EPS).

Are More Gains In The Cards For Qorvo Stock?

The ongoing transition to 5G technology should help Qorvo in the near to medium-term. On the smartphone front, the company expects 5G handset shipments to double from 250 million in 2020 to 500 million units this year. 5G components are also more complex and expensive compared to 4G and Qorvo estimates that each 5G smartphone could add incremental RF content of about $5 to $7. ^[1] Qorvo should also benefit from strong demand from Apple – one of its largest customers. Apple has raised its iPhone production targets for H1 2021 by 30% compared to last year per Nikkei. ^[2] Separately, Qorvo’s infrastructure business, which has witnessed a mixed performance in recent years, should also pick up, driven by the deployment of 5G base stations and demand for its GaN power amplifiers.

Overall, Qorvo is poised for strong growth over this fiscal year, with its Revenues poised to jump by around 18% per consensus estimates, and earnings are also expected to rise to about $8.50 per share, on an adjusted basis. This makes the company’s forward P/E relatively attractive at about 21x. Considering the relatively reasonable forward valuation, we think the stock has scope for some gains in the near-term. That being said, investors should note that the semiconductor market is somewhat cyclical, and if there are signs that the 5G upgrade cycle is saturating, the stock could see a correction.

1. QRVO Q2 2021 Earnings Call Transcript, Seeking Alpha [↩]
2. Apple plans 30% boost in iPhone production for first half of 2021, Nikkei [↩]