Is It Time to Retreat on Qorvo?

Radio frequency chipmaker Qorvo (QRVO -1.01%) experienced phenomenal growth in 2019, with the stock's value increasing by more than 90%. Considering the stock's high growth last year, should investors consider taking profits now and reallocating the money to a competitor with better growth prospects for 2020? 

Let's discuss Qorvo's story. The success comes from its unique competitive strengths in wireless communication technologies such as 5G networks, cloud computing, and Internet of Things (IoT) technology. This has allowed the company to provide positive revenue growth for the past two quarters.

Its recent fiscal third-quarter 2020 earnings topped analysts' expectations, making it the fourth consecutive time the company beat Wall Street's consensus. Following the report on Jan. 29, Qorvo's stock is trading lower by nearly 9%.

Image source: Getty Images.

What's the hype?

Qorvo is a radio frequency chipmaker, meaning its transmitters allow for communication over radio waves as well as the collection of data. Qorvo's business is made up of several clients, including smartphone manufacturers and the military and defense and aerospace industries. 

Smartphones use radio frequency technology. Many people can identify it as the 4G/LTE/WiMax signals that keep phones connected to the internet. Currently, there's a major shift happening in the smartphone industry. Carriers are upgrading their technology to offer the newest 5G bands. 

Qorvo wants to be at the forefront of this transition. 5G technology promises to make mobile internet access faster, allow communication between devices, and speed up technological advancement. Its adoption will support the growth of other technologies such as cloud computing and IoT. 

Qorvo's technology can also help businesses improve their operations. Cloud computing allows users to access data and applications much more quickly. IoT facilitates the connection of devices so they can communicate and transmit data back and forth, and allows businesses to collect insights and identify gaps within their operations. Qorvo's products can help businesses advance technology and allow for growth into new industries.

Considering the rising demand for these innovations, Qorvo's future looks bright. Investors should monitor new developments that could lead to a potential increase in its stock value over the long term. 

Earnings beat machine

Qorvo beat on both top- and bottom-line results, posting a revenue of $869.1 million and earnings per share of $1.86, exceeding Wall Street's consensus by $16.5 million and $0.18, respectively. This will be the fourth consecutive time Qorvo posted an earnings beat, all due to the demand in 5G adoption. 

The mobile segment of the company focused on products such as 5G also exceeded the company's expectations, bringing in revenue of over $662 million. The guidance for total revenue was $852.6 million, and revenues increased by 1.94%. The strongest demand came from Asian consumers and was driven by a desire for 5G products. 

However, compared to last year, Qorvo's infrastructure and defense products (IDP) segment provided mixed results. Defense products for military and aerospace provided higher volumes, while infrastructure products remained down because of trade restrictions.

CFO Mark Murphy expressed his confidence in the next quarter with continued demand for 5G and strength in the defense segment. "Our revenue outlook for the March quarter reflects continued robust mobile 5G demand and a return to year-over-year growth for IDP," he said.

The growth in these segments is expected to continue for years to come, as the focus of 5G adoption will occur globally. Investors should monitor the developments in this space as the company seems poised for profitability.

Strength in the business

Qorvo offers long-term value for its investors. The company increased its revenue by 36.8% since last year and showed continued consecutive revenue growth in the past three quarters.

Data source: The Wall Street Journal.

The company has made strategic moves to expand its pipeline of products. In 2019, the Qorvo acquired two companies: Cavendish Kinetics Limited for $305.9 million and Active-Semi International for $307.9 million. Both of these companies will strengthen its portfolio of products focused on IoT, 5G, infrastructure, and defense products. In addition, Qorvo recently partnered with Nordic Semiconductor to strengthen its IoT portfolio for battery-powered devices. The company's focus on the long-term growth in these segments represents its goals for profitability and more profits to investors. 

Fierce competitors

Qorvo's closest competitors include Skyworks Solutions (SWKS -1.37%) and Qualcomm (QCOM -1.18%). Skyworks Solutions competes with Qorvo in both its mobile device and IDP segments, and the company recently posted positive earnings with sales far above analyst expectations. Qualcomm is an early supplier of 5G chips and continues to dominate the market share of the smartphone market with roughly 43% revenue. Both of these companies may pose a threat to Qorvo as they are suppliers to Apple (AAPL -0.09%). With Apple scheduled to launch a 5G phone later this year, Skyworks Solutions and Qualcomm appear to be positioned for short-term success with a profitable future ahead. 

With that in mind, investors should consider the current valuation of Qorvo by looking at its PEG ratio. This metric provides an accurate valuation measure, and investors should understand that a value of 1 is a perfect correlation between P/E ratio and projected earnings growth. A value greater than 1 implies overvaluation, while a ratio of less than 1 suggests undervaluation. Qorvo has a PEG ratio of 1.79. When comparing this metric to its peers Skyworks Solutions (1.25) and Qualcomm (0.79), Qualcomm has the advantage.

Positioned for long term

Investors considering investing in Qorvo for its exposure to consumer trends like 5G should consider buying Qualcomm in the short-term. Qorvo provides stability with its continued revenue growth and focus on further developments in the 5G, IoT, and cloud computing spaces.

When considering a longer term horizon, Qorvo's portfolio continues to build with partnerships and acquisitions. This strategy will help Qorvo stay at the forefront of the competition when the 5G growth saturates in years to come. Although Qualcomm is currently a better buy today, Qorvo's strengths in IoT and delivering products for defense and aerospace will help the company come out on top in the long run.