2023-08-15 18:25:31 ET
Summary
- We’re downgrading Qorvo, Inc. to a hold.
- The stock is up roughly 9% since our upgrade to buy, outperforming the S&P 500 by 1%, driven by the better-than-expected near-term outlook.
- Consistent with our investment thesis, industry inventory correction has played out, and Qorvo, Inc. expects a strong rebound for the September quarter driven primarily by content gain at Apple's upcoming iPhone.
- We think Qorvo's financial performance will now be more in-line relative to Wall Street expectations, as we don’t expect smartphone market end-demand will improve materially in 2024.
- While we like management's diversification effort into non-cellular markets, Qorvo, Inc. ultimately needs the advanced cellular division (which accounts for about 65% of total sales) to drive outperformance.
We’re downgrading Qorvo, Inc. ( QRVO ) to a hold from a buy post Q1 2024 earnings results. We now think the company’s financial performance will be more in-line relative to expectations, and we don’t see the smartphone market end-demand improving materially in 2024. Our downgrade is based on our belief that QRVO’s advanced cellular group won’t experience a meaningful recovery in smartphone end demand in the near-term; advanced cellular group revenue declined 1% QoQ and 39% Y/Y to $412,209M this quarter, accounting for roughly 63% of sales. While we like management's diversification effort into non-cellular markets such as high-performance analog, sensor, and power management ICs, QRVO ultimately needs the advanced cellular division to drive outperformance.
The stock is up roughly 9% since our upgrade to buy, outperforming the S&P 500 (SP500) by 1%, driven by the better-than-expected near-term outlook. YTD, the stock is up 12%, underperforming the S&P 500 by around 5%. We don’t see QRVO outperforming in the near term and see names better positioned to look into.
The following graph outlines our rating history on QRVO.
Consistent with our investment thesis in May, the industry inventory correction has played out, and QRVO expects a strong rebound for the September quarter driven primarily by content gain at Apple's ( AAPL ) upcoming iPhone 15, scheduled for release in mid-September. Management guided for $1B in sales +/- 15M next quarter. This quarter the company beat top and bottom lines this quarter, reporting revenue of $651.2M, down 37.4% Y/Y and up 3% sequentially. We saw growth in the high-performance analog sales, up 5% sequentially but down 37% Y/Y to $140M, and connectivity and sensor group sales rebounding 21% sequentially but down 54% Y/Y at $99M. We think growth in high-performance segments will be offset by weaker smartphone demand impacting QRVO's main revenue stream, the advanced cellular group. Hence don't see the stock being an outperformer in the near term.
The following graph outlines the performance of QRVO against Qualcomm (QCOM), Skyworks Solutions (SWKS), and the S&P 500, YTD.
Valuation
The stock is relatively cheap, trading at 19.6x C2023 on a P/E basis EPS $5.20 compared to the peer group average of 29.6x. The stock is trading at 3.1x EV/C2023 Sales versus the peer group average of 5.8x. We recommend investors against being tempted by the attractive valuation as we don’t see the stock outperforming in the near-term.
The following chart outlines QRVO’s valuation against the peer group average.
Word on Wall Street
Wall Street is bearish on the stock. Of the 31 analysts covering the stock, eight are buy-rated, 21 are hold-rated, and the remaining are sell-rated. The stock is currently priced at $102 per share. The median sell-side price target is $113, while the mean is $114, with a potential 11-12% upside.
The following charts outline QRVO’s sell-side ratings and price targets.
What to do with the stock
We’re downgrading Qorvo, Inc. to a hold from a buy as we don’t see the stock outperforming in the near-term. While we think inventory correction cycles are over, we think smartphone demand won't improve substantially in the near-term. We see QRVO’s financial performance to be more in-line with expectations; management noted on the call that reductions in channel inventories will continue in the September quarter but should normalize by the end of the calendar year.
We think the lack of end market smartphone demand is weighing on QRVO and will continue to be a headwind for the near-term. We recommend investors stay on the sidelines, as we see Qorvo, Inc. stock outperforming in 2024 once demand rebounds, but don’t see it working in the near-term.
For further details see:
Qorvo: Downgrading To Hold On Sluggish Near-Term Smartphone End-Market Demand