At $175 Per Share, Is Qorvo The Cheapest 5G Semiconductor Play?

Qorvo (NASDAQ: QRVO) is a semiconductor vendor best known for supplying radio frequency (RF) components, ultra-wideband, and WiFi solutions for consumer electronics products. The stock has been a relative underperformer this year, rising by just about 6% year-to-date, compared to the S&P 500 which has gained almost 13%. At current levels, we think the stock is a solid play on the ongoing transition of the wireless industry to 5G technology. Qorvo stock trades at just about $175 per share or 15x projected FY’22 earnings (FY ends March), well below the semiconductor sector, which trades at over 40x forward earnings. ^[1]  Growth is also likely to remain strong, with revenues projected to rise by over 15% this year and growth could hold up, as 5G deployments are expected to be quicker compared to 3G and 4G standards deployed over the last decade or so. Moreover, 5G tech will extend well beyond mobile phones, to areas such as fixed wireless access and the Internet of Things and this could drive further upside for Qorvo.

Although Qorvo’s front-end components are much lower value compared to the components supplied by the likes of Qualcomm and Broadcom, with the company holding just about 2% of RF component value share in 2019 smartphone flagships, this could actually be positive for Qorvo. ^[2] Smartphone players such as Apple who have steadily moved to design their own higher-value components (such as application processors, modems) likely have less incentive to replace Qorvo’s chips. At the same time, despite its lower value components, Qorvo has steadily been boosting its profitability.  Operating margins have been rising steadily from about 7% in FY’19 to 13% in FY’20 and almost 23% in FY’21. Moreover, Qorvo should also be somewhat insulated from the semiconductor supply crunch as it operates its own foundries, which should enable it to meet demand.

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. ^[3] 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. ^[4] 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. PE Ratio By Sector, NYU Stern [↩]
2. RF Front End Module Share, Systemplus [↩]
3. QRVO Q2 2021 Earnings Call Transcript, Seeking Alpha [↩]
4. Apple plans 30% boost in iPhone production for first half of 2021, Nikkei [↩]