2023-04-27 17:49:23 ET
Summary
- Shares of RF chipmaker Qorvo, Inc. have come under serious pressure over the past couple of years due to falling revenues and shrinking margins.
- Qorvo's inventories have shot up, and the company has been struggling to offload them.
- Qorvo's potential to bounce back lies mainly in margin and revenue improvements in the coming quarters.
Earnings season is well and truly underway, with ~20% of S&P 500 companies having reported Q1 2023 earnings as per FactSet data . The pivotal tech sector and semiconductor industry have been a rather mixed bag this season, with Big Tech companies like Microsoft Corporation (MSFT), Alphabet Inc. ( GOOG , GOOGL ) exceeding Wall Street projections while others like Taiwan Semiconductor (TSM), Samsung Electronics Co. ( SSNLF ) and even Tesla, Inc. ( TSLA ) have failed to impress. I have included a qualifier for Tesla because the investing world cannot seem to agree whether or not Tesla qualifies as a tech company, which I feel it does after Elon Musk’s latest comments about Tesla becoming more like a software and services company. But I digress.
Unfortunately, Qorvo, Inc. (QRVO)--a semiconductor company that I used to cover here on Seeking Alpha rather frequently -- belongs to the latter category. Qorvo is due to report FQ4 2023 earnings in a week’s time on 05/03/2023 after market close. What has caught my attention about Qorvo is the alarming earnings trend by this company over the past couple of quarters and years. Although Qorvo has exceeded earnings expectations for six straight quarters, its bottom line has been shrinking at a worrying clip. According to Zacks Investment Research, based on 8 analysts' forecasts, Qorvo is expected to report GAAP EPS of -$0.16 in its upcoming report compared to $1.95 for last year’s comparable quarter, while revenues are expected to clock in at $621.27 million, down 46.7% from the year-ago quarter.
Qorvo is a global chipmaker of mobile and Infrastructure & Defense Products ((IDP)), including RF filters, duplexers, switch modules, cellular base stations and multimode/multi-band power amplifiers, among other products. The last time I covered Qorvo a few years ago, it was in a tailspin due to regulatory issues after the former President Trump’s administration slapped a ban on Huawei on a national security order. Back then, Huawei was one of Qorvo’s top customers , contributing nearly ~10% to Qorvo’s top-line. The two had such a strong relationship that Qorvo’s components were found in a Huawei P40 teardown long after the ban.
Still, I chose to play the contrarian and bet that Qorvo was resilient enough and would quickly bounce back, helped by its dominance in 5G, IoT, smart home devices and Infrastructure & Defense Products ((IDP)). Well, it certainly did, and actually saw annual revenue growth accelerate and margin expand significantly in subsequent years. Not surprisingly, QRVO stock enjoyed its most productive period, climbing 172% from the time my article was published in August 2019 till it hit an all-time high in July 2021.
QRVO Stock 5-Year Returns (Seeking Alpha)
Unfortunately, it’s been all downhill since then, with QRVO nearly giving up all its earlier gains thanks to the Covid-19 pandemic and serious supply issues that plagued the semiconductor industry in general.
Just like its peer Himax Technologies, Inc. (HIMX), which I covered here , Qorvo is going through a serious inventory correction cycle that has seen its revenue contract nearly 40% from its peak and margins erode sharply. Over the past one year, Qorvo’s margin profile has been negatively impacted by cutting prices in a bid to offload excess inventories, aka channel destocking, particularly for the company’s legacy filter and power management businesses. Qorvo has been hit particularly badly due to its heavy reliance on Chinese smartphone OEMs which contributed as much as 40% to the topline before the pandemic.
So, when will the inventory overhang finally be dealt with? Well, Qorvo’s management has not provided any solid timelines, but said :
“Qorvo’s inventory position will decline in March, but remain elevated. In terms of channel inventory, the picture has begun to improve. For example, total channel inventory for our components in the Android ecosystem was reduced by over 20% in the December quarter. We expect continued improvement this quarter and anticipate the channel to normalize later this calendar year.”
That’s quite encouraging.
This Wall Street analyst has concurred: ‘‘...the inventory digestion will likely hamper the radiofrequency chip maker until the second half of the year.’’
I tend to agree based on the fact that this appears to be an industrywide trend, and the consensus appears to be that inventory issues will wear off as the quarters roll on. For instance, during its latest earnings call, Himax told investors that these effects will gradually diminish throughout the year and expects its inventory levels to return to historical averages not later than Q3 2023.
Even better for Qorvo, Chinese OEMs now contribute only 20% of overall revenue down from 40%, leaving the company less exposed to the capricious Chinese market.
Qorvo Profit Margins
Qorvo Profit Margins (Macrotrends)
Covering Many Bases
I expect QRVO shares will bottom out around the time the company’s margins start improving, which should coincide with a period of improvement in inventory levels. However, I don’t expect to see another spectacular runup by the shares like the one we witnessed in 2018-2021 for the simple reason that I think Qorvo does not appear laser-focused on a particular megatrend.
On the contrary, the market appears to be rewarding semiconductor companies with a sharp focus on one or a few red-hot segments. I know that sounds a bit controversial but let me explain.
When Jim Anderson took over the reins as CEO at Lattice Semiconductor Corporation ( LSCC ) in September 2018, he doubled down on the company’s new mission to become the "low power programmable leader." That represented a radical shift from the company’s past where it tried to cover many bases including getting into a bunch of only tangentially related businesses such as HDMI and USB-C. Lattice is now 100% committed to low-powered FPGA verticals with high ROIs including 5G, servers, industrial IoT, ADAS (Advanced Driver-Assistance Systems) among others. The FPGA maker now focuses on FPGAs in the 1mW to 1-watt power range and 2 mm2 to 100 mm2. In contrast, rival companies like Advanced Micro Devices, Inc. (AMD) and Intel Corporation (INTC) serve the higher-end with larger power-hungry FPGAs that operate at around 200 watts and 3,000 mm2.
The business model transition has helped Lattice to transform from a little-known FPGA maker to one of the most respected semiconductors companies. I think the only reason why LSCC only holds a HOLD rating on Seeking Alpha Quant is due to its rich valuation. It’s also the reason why the shares have been pulling back, lately, with LSCC up nearly 1,300% over the past 5 years.
Qorvo has lately battled it out with Skyworks Solutions ( SWKS ) in 5G and the carrier aggregation front--and sometimes won--but it's hard to argue that it holds a definitive advantage in secular trends like 5G and IoT over its rivals. I, therefore, think that Qorvo, Inc.’s biggest potential to bounce back comes from the fact that there’s ample room for top- and bottom-line improvement coupled with the fact that QRVO shares are some of the cheapest in the sector.
For further details see:
Will Qorvo, Inc. Finally Bounce Back?