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Why Qorvo’s Latest Results Make It a Buy

Harsh Chauhan, The Motley Fool

Chipmaker Qorvo (NASDAQ: QRVO) was down and out going into its third-quarter report, but it gave investors a glimmer of hope when the results actually came out. The supplier of radio-frequency chips beat the market's expectations by a big margin last quarter, helping it get back into investors' good graces as shares shot up over 13% in a single day.

Qorvo's Q4 guidance was disappointing, but its stock still soared. That's because Wall Street was willing to overlook the short-term weakness faced by the chipmaker caused by weak smartphone demand. Qorvo claims that it will make things right in the long run, and investors seem to have bought into this promise. But have they done the right thing? Let's find out.

A person holding a smartphone.

Image Source: Getty Images.

The mobile business needs to step up

Mobile supplied almost 76%, or $642 million, of Qorvo's total revenue during Q3. By comparison, Qorvo's mobile revenue stood at $656.8 million in the year-ago period. So the chipmaker's mobile revenue shrunk year over year despite a "strong ramp in support of our largest customer," which is Apple (NASDAQ: AAPL).

Apple supplies around 40% of Qorvo's revenue, making it a big factor in determining its financial performance. But Qorvo was unable to land any new content inside Cupertino's latest iPhones, ceding ground to rivals such as Skyworks and Broadcom. Additionally, Apple's iPhone sales dropped slightly during the holiday quarter as compared to the prior-year period. This further weakened Qorvo's mobile performance, with Cupertino reportedly scaling back production in light of weak demand.

Looking ahead, Qorvo expects the mobile weakness to continue in the near term, which is why its guidance turned out to be way below consensus estimates. The company expects $655 million in revenue at the midpoint of its expectations, while analysts were originally modeling $777 million. So, Qorvo's revenue will increase just 1% year over year in the March quarter if it manages to hit the midpoint of its guidance.

Still, investors are in a celebratory mood because of a potential contract from Apple toward the end of the year that could change the game for the chipmaker. Eric Creviston, president of Qorvo's mobile products group, believes that the company will witness the "largest actual generation-over-generation content increase we have seen, driven by many product categories."

This potential design win against rival chipmaker Broadcom led Nomura to upgrade Qorvo to a buy. Analyst Krysten Sciacca estimates that the new Apple contract could boost the chipmaker's revenue by $230 million to $305 million during the second half of 2018. Qorvo generated $1.66 billion in revenue during the second half of calendar 2017, so this contract could boost its top line by as much as 18% this year.

It isn't surprising to see investors pouncing on the opportunity to buy more Qorvo stock, which had been in the dumps since November last year. But Qorvo's promise of a strong ramp-up at Apple needs to be taken with a pinch of salt, as the company has a habit of promising a bright future but underperforming when it comes to delivery.

The IoT business is picking up pace

One of the highlights of Qorvo's Q3 performance was the bump in its Internet of Things (IoT) business. It saw a 20% year-over-year jump in its infrastructure and defense products revenue thanks to a strong contribution from IoT-related sales. And Qorvo's smart-home product sales shot up 30% year over year.

Qorvo's IoT business looks set to get even better this year as the company's design wins in the infrastructure and defense products shot up 40% year over year during the last reported quarter. Qorvo is also supporting several smart-home connectivity protocols with its embedded chip platforms.

The company claims that its smart-home related chips can reduce costs because of low power consumption. Additionally, their ability to support multiple connectivity protocols reduces development costs for original equipment manufacturers making smart-home solutions because they don't have to use different chips for different standards.

The good news is that these product developments are bearing fruit for Qorvo, as evident from the sharp jump in sales of its smart-home solutions. It's now finding a footing in the fast-growing IoT market. This could be a big deal for the company in the long run because the number of devices connecting to the internet could jump from 30.7 billion in 2020 to 75.4 billion in 2025 according to one estimate.

But Qorvo needs to improve in the mobile market, as this supplies the majority of its revenue. Management will provide more color about the direction of the mobile segment in the month of May, but if it has indeed displaced rival Broadcom at Apple, Qorvo investors can expect big gains later this year.

And investors looking to bet on Qorvo's turnaround have another good reason to buy the shares. The company trades at 12.6 times forward earnings, which is significantly cheaper than the 31.1 industry average, giving investors a cheap entry point to take advantage of smartphones and the IoT market.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple and Skyworks Solutions. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Broadcom Ltd. The Motley Fool has a disclosure policy.