Known for primarily supplying chips to smartphone manufacturers, Qorvo (QRVO) has delivered underwhelming returns on the stock market so far in 2024 with a flat performance. That’s quite weak compared to the 32% gains that the PHLX Semiconductor Sector index has delivered so far this year, but the good part is that Qorvo stock has gained impressive momentum of late.
A closer look at the chart below indicates that Qorvo may be making a parabolic move.
Shares of the company, which counts Apple as its largest customer, are up 16% in June. A closer look at Qorvo’s latest quarterly report and its solid prospects indicate that the stock could sustain its terrific momentum and may even go parabolic, which refers to the rapid rise in the price of a company in a short time — similar to the right side of a parabolic curve.
Let’s see why that may be the case and also check why now may be a good time to buy this chip stock.
Qorvo could outperform the market’s expectations
Qorvo released its fiscal 2024 fourth-quarter results (for the three months ended March 30) on May 1. The company posted full-year revenue of $3.77 billion, an increase of 5.6% from the year-ago period. However, for the fourth quarter of fiscal 2024, Qorvo’s top line shot up 49% year over year to $941 million, easily exceeding its guidance of $925 million for the quarter.
Qorvo attributed the robust year-over-year revenue gains to “significant content gains with key mobile customers and robust revenue growth in … [its] defense and aerospace business.” Management pointed out on the May earnings conference call that the company supplied radio frequency (RF) chips to flagship Android OEMs (original equipment manufacturers) such as Samsung.
Additionally, Qorvo’s products are gaining traction in China. The top four OEMs in China have adopted more of the company’s chips, and Qorvo is set to begin volume shipments of its products to those customers this year. This explains why Qorvo’s guidance for the current quarter has turned out to be a solid one. The company expects fiscal 2025 Q1 revenue of $850 million, which would be a 30% increase from the same period last year.
The midpoint of its earnings guidance stands at $0.70 per share, which would be more than double the year-ago period’s figure of $0.34 per share. However, Qorvo seems to have adopted a measured approach for the full fiscal year, pointing out that it is expecting fiscal 2025 revenue to increase modestly. Analysts are forecasting an increase of just 3% in its full-year revenue to $3.9 billion, followed by a stronger jump of 8.3% in fiscal 2026.
However, don’t be surprised to see Qorvo ending the year with stronger growth and outpacing analysts’ expectations because of a big catalyst that it is sitting on. Qorvo gets most of its revenue from selling mobile chips. Apple and Samsung are two of its largest customers. While Apple produced 46% of Qorvo’s top line in the previous fiscal year, Samsung accounted for 12%.
It is worth noting that these are the top two smartphone OEMs globally, with a combined market share of just over 38% in the first quarter of 2024. This puts them in a solid position to capitalize on the next big thing in the smartphone industry — artificial intelligence (AI).
Market research firm IDC expects 170 million AI-enabled smartphones to be shipped in 2024, up from 51 million last year. This year, AI smartphones are expected to account for 15% of the overall smartphone market, indicating that their sales could keep climbing at an impressive pace in the long run. Counterpoint Research, for instance, forecasts shipments of AI smartphones to grow fourfold over the next five years.
Samsung has already jumped into the AI smartphone market with its Galaxy S24 series of smartphones. This seems to have benefited Qorvo as the company points out that smartphones with AI assistants require more RF content. And now, Apple seems set to jump into the AI smartphone market as well this year.
The company recently announced Apple Intelligence, a suite of applications that will allow customers to use multiple AI features such as transcribing and summarizing audio, creating images and emojis, and using an AI-powered Siri. The addition of AI features to Apple’s upcoming iPhones is expected to give the company’s sales a nice boost, with shipments expected to grow 10% in the next fiscal year to 244 million units, as per JPMorgan.
For comparison, iPhone shipments were down almost 10% in the first quarter of 2024. As a result, there is a good chance that its mobile business could deliver a stronger-than-expected performance this year and help the company deliver faster growth.
An attractive valuation is another reason to buy the stock
Qorvo stock is trading at 3 times sales and 18 times forward earnings. Those multiples are significantly lower than the U.S. technology sector’s average sales multiple of 8.2 and earnings multiple of 48.
We have seen that Qorvo delivered impressive growth last quarter and its guidance for the current quarter is also solid. At the same time, the company’s prospects look better on account of an improvement in the smartphone market, driven by the advent of AI. Qorvo’s earnings have declined at an annual rate of almost 9% over the past five years, but analysts are forecasting 10% annual growth over the next five.
The solid AI-related catalyst that Qorvo is sitting on could help it outperform the market’s expectations. That’s probably the reason why investors have been piling into this semiconductor stock of late while it is still cheap, and savvy investors looking to buy a potential AI winner can consider doing the same.
— Harsh Chauhan
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Source: The Motley Fool