2023-05-09 12:40:35 ET
Summary
- We’re upgrading Qorvo, Inc. to a buy.
- We believe customers' inventory correction in the IoT and smartphone OEMs impacting its top line and margins over the past four quarters are now behind the company.
- We see growth in the second half of 2023 to be driven by inventory replenishment and content growth driven by the increased 5G shipments and technology transition to WiFi6E.
- Additionally, we believe Qorvo, Inc. will benefit from the increased content at Apple Inc. and Samsung Electronics Co., Ltd. towards the second half of 2023 and into 2024.
- We recommend investors look for entry points into the stock at current levels as we believe Qorvo, Inc. is positioned to outperform in the second half of 2023 and 2024.
We're upgrading Qorvo, Inc. ( QRVO ) to a buy, as we believe inventory correction cycles in the IoT and smartphone OEMs are over. We previously coupled QRVO and Skyworks Solutions, Inc. ( SWKS ) together in a hold-rating back in June, as we foresaw demand headwinds due to smartphone market contraction in the post-pandemic environment. We upgraded SWKS back in November based on our belief that smartphone demand headwinds have been priced into the stock and expected content growth in 5G and Wi-Fi markets to drive growth; since our upgrade, SWKS stock is up roughly 25%.
We're now moving QRVO to a buy because we believe the inventory correction cycle that depressed revenue growth and margins over the past fiscal year is behind the company. We see a clearer growth path in 2H23 and 2024. The stock is down around 5% since our hold rating, underperforming the S&P 500 (SP500) by about 11%. The following graph outlines our rating history on QRVO.
Qorvo, Inc. is heavily exposed to the smartphone market; with worldwide smartphone shipments dropping roughly 18.3% Y/Y in 4Q22 and 11.3% in 2022, it's no surprise that QRVO's been struggling over the past year. The smartphone market continues to contract this year; according to Canalys' latest research, global smartphone shipments fell 13% in 1Q23 alone. We forecast the smartphone TAM to contract by roughly 2.5% to 1.18B in 2023 compared to 1.21B in 2022.
Still, we're seeing positive signs of smartphones stabilizing after rigid inventory correction cycles; we believe supply-demand dynamics are coming into balance after OEMs work through built-up inventory caused by pandemic-led demand levels and mismatched post-pandemic consumer spending slumps. While we don't expect its core smartphone and IoT markets to return to growth in 2023, we expect QRVO to be well-positioned to grow in 2H23 and 2024, driven by inventory replenishment and content growth due to the increased 5G shipments and technology transition to WiFi6E. We recommend investors begin exploring entry points into the stock at current levels.
4Q23 & What's Next
QRVO reported Q4 2023 earnings results last week, beating the top and bottom lines. Still, in FY2023, revenues depreciated to $3,569.4M compared to $4,645.7M in FY2022. Sales declined 15% sequentially and 45.9% Y/Y to $633M in 4Q23 but still outperformed consensus for the most part.
Our bullish sentiment on QRVO is based on our belief that demand has bottomed this quarter, and we expect the company to be better positioned to grow in 2H23 and 2024. We expect this quarter to reflect lower end-market demand due to consumer exposure and channel inventory digestion in Android. We believe inventory correction cycles will be wrapped up by the end of 1H23 and expect inventory replenishment to drive growth in the second half of the year.
The March quarter was a low point for Chinese Android OEMs due to inventory correction cycles. We now expect a modest unit rebound by Chinese Android OEMs after inventory correction is completed and as they pivot their 5G models to export markets, including India, Africa, and Latin America. We expect QRVO's top-line growth to be driven by the second wave of 5G; the GSMA Intelligence expects 5G connections to double over the next two years, driven by "5G network deployments in more than 30 countries in 2023 alone." Increased 5G shipments should drive the next leg of growth.
We're also constructive on QRVO expanding its Wi-Fi portfolio with Wi-Fi 7 BAW filter design win "enabling full coverage of 2.4, 5 and 6 gigahertz bands for smartphones and consumer and enterprise access points." Increased technology transition to WiFi6E, the next-gen standard in WiFi tech, should also help accelerate revenue growth in 2H23 and 2024.
We also expect QRVO's outperformance over coming quarters to be driven by content gains at Apple Inc. ( AAPL ) and Samsung Electronics Co., Ltd. (SSNLF) toward 2H23 and 2024. AAPL and Samsung made up the two 10% customers in FY2023; AAPL accounted for 37% of total sales this year, versus 33% in FY2022, while Samsung accounted for 12% of total sales in FY2023 versus 11% in FY2022. We're confident that QRVO will grow these percentages in FY2024 despite the muted demand environment.
Valuation
Qorvo, Inc. is relatively cheap, trading at 19.2x C2023 EPS $4.84 on a P/E basis compared to the peer group average at 24.0x. The stock is trading at 3.0x EV/C2023 versus the peer group average of 5.2x. We see favorable entry points into the stock at current levels as we expect QRVO to outperform in 2H23 and 2024.
The following chart outlines QRVO's valuation versus the peer group.
Word on Wall Street
Wall Street is bearish on the stock. Of the 30 analysts covering the stock, six are buy-rated, 22 are hold-rated, and the remaining are sell-rated. We attribute Wall Street's bearish sentiment to the current downtrend in the semi-space and weaker consumer demand on the smartphone front. Our bullish thesis is driven by our belief that demand has bottomed and the market is stabilizing. The stock is currently priced at $93 per share. The median and mean sell-side price targets are $109, with a potential upside of 17%.
The following charts outline QRVO's sell-side ratings and price targets.
Tech Stock Pros
What to do with the stock
We're upgrading Qorvo, Inc. to a buy. Our bullish sentiment is driven by our belief that demand has bottomed and QRVO is better positioned to outperform after inventory correction cycles have been completed. We expect QRVO's top-line growth to be caused by content gains with AAPL and Samsung and demand recovery from Android Chinese OEMs as they export 5G to new geographies. We also like management's diversification into the power IC market. We believe this business line will likely grow faster than its mobile cellular and IoT connectivity businesses. We believe Qorvo, Inc. stock presents a favorable risk-reward profile and recommend investors buy in at current levels.
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For further details see:
Qorvo: Inventory Correction Cycle Completed - Upgrading To Buy