This article is part of our Rising Star Portfolios series.
In early November, I recommended that readers buy Cirrus Logic
Why go RF?
In mobile devices, radio frequency chips ensure reliable connections to the towers streaming voice and data connections. TriQuint and the other companies making these RF chips face a huge opportunity as the mobile world shifts from old-fashioned feature phones to technologically advanced smartphones. Feature phones generally connect only to voice networks that require limited RF technology. But smartphones now connect not only to voice networks, but also to varying data networks such as EDGE, 3G, and now 4G. These different networks all run on divergent bands, or frequencies, creating increased complexity. Additional bands mean more of the power amplifiers and filters that RF companies provide.
Against this backdrop of increasing complexity, RF companies provide twice or three times as many components to smartphones -- with like increases in revenue -- as they provided to feature phones. Researcher Gartner said that smartphone use grew 96% year over year in Q3 2010, suggesting that outsized growth awaits RF companies in the years ahead.
Why go TriQuint?
Like Cirrus Logic, one of my main reasons for choosing TriQuint is the company's association with Apple
Apple is ramping up production of iPhones and iPads so quickly that it's almost forced to stick with proven solutions it knows. For example, when the iPad was released, it featured the same power amplifiers used in the original iPhone 3G design from two years earlier. That dependency reduces the odds that a rival supplier will bump TriQuint out of Apple's favor.
Industry participants also begrudgingly agree that displacing TriQuint within Apple's product lines is very difficult. Here's what Anadigics CEO Mario Rivas had to say when asked about whether Anadigics had scored a spot in the new Verizon iPhone:
No, we are not [in the Verizon iPhone]. Apple has made very good progress from the original iPhone, to iPhone 2, 3, 3GS and 4. But as it migrated from Infineon [baseband] chipset to that of Qualcomm [CDMA], all the while transitioning to Apple's own A4, Apple probably didn't have much time for making radical changes [in power amplifiers]. They went with what they are familiar with.
Within the next week -- perhaps even by tomorrow -- teardowns of the Verizon iPhone should confirm its components, but all indications suggest that TriQuint has kept its spot. Simply put, as long as you can supply the chips Apple needs, and your products are working well, Apple will worry about bigger problems and leave your components in place.
What could go right?
TriQuint's sales for 2010 should come in at around $880 million. Within that total, I estimate Apple should account for around $210 million. Assuming that the next generation of the iPhone splits its RF costs between TriQuint and Skyworks at approximately the same rate as the iPhone 4, and that TriQuint maintains its spot within the iPad, the company should see around $350 million in sales from Apple alone. That means Apple by itself could account for about 16% top-line growth for TriQuint next year.
Right now, analysts project only 16% growth for all of TriQuint next year.
When you consider that Apple accounts for around 24% of TriQuint's revenue, there's plenty of room for other growth within in smartphone market projected to grow by about 56% this year, according to the Consumer Electronics Association. Also, throw in a networking business that's enjoying rebounding demand and a crucial place in the booming backhaul industry, and TriQuint is poised to blow all away expectations set for it in the coming year.
What could go wrong?
Of course, there are always risks to every rosy scenario. TriQuint's biggest danger lies in competition within the RF space. The last iPhone refresh saw Skyworks win several bands of power amplifiers. TriQuint's inability to meet surging demand for Apple products is likely at play here. Its main Oregon fabrication facility, which is responsible for 75% of revenue, currently runs at more than 90% capacity. Apple will likely continue splitting wins between RF providers to lessen the risk of constrained orders for power amplifiers and filters. If the next generation of iPhones or iPads tilts more in Skyworks' favor, that could limit TriQuint's iPhone and iPad-fueled growth.
Also, rival RF Micro Devices' growth rates now trail the industry average, thanks to its reliance on Nokia
There's much more to be said about TriQuint, and I'll follow up tomorrow with additional data on why I think the company is a winning selection, despite its recent massive share growth. If you'd like to continue following my thoughts on TriQuint, please subscribe to my Twitter account @bleekertech, where I'll post links to my updates on the company and other players in the mobile field. In the meantime, tomorrow I'll be buying both shares and August call options on TriQuint, ahead of the company's earnings on Wednesday.