Rising Stars Buy: TriQuint

This article is part of our Rising Star Portfolios series.

In early November, I recommended that readers buy Cirrus Logic (Nasdaq: CRUS  ) , as smartphone designers increasingly adopted its audio-chip designs to save both power and space. But Cirrus isn't alone. Companies providing radio frequency components are also winning big, including RF Micro Devices (Nasdaq: RFMD  ) , Skyworks (Nasdaq: SWKS  ) , Anadigics (Nasdaq: ANAD  ) , and TriQuint (Nasdaq: TQNT  ) . I believe that several of these companies are solid buys, but today, I'm recommending TriQuint, and announcing my intent to buy its shares for my "Bits Portfolio."

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 (Nasdaq: AAPL  ) . TriQuint has been inside Apple's gear since the first 3G iPhone, and has now expanded to a placement within the iPad as well.

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 (NYSE: NOK  ) ; to catch up, the company could try to throw its weight around in coming months. Nokia currently accounts for 55% of the company's sales. With the Finnish giant sinking, RF has decided to diversify its customer base. Whenever a company is itching to broaden its customer base, there's a risk that it could aggressively price components and put margin pressure on other competitors within the industry.

Bottom line
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.

Eric Bleeker owns shares of Cirrus Logic. Apple is a Motley Fool Stock Advisor choice. The Fool has written puts on Apple. The Fool owns shares of Apple, and Cirrus Logic. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (10) | Recommend This Article (20)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 07, 2011, at 2:20 PM, Henry3Dogg wrote:

    You said

    "In mobile devices, radio frequency chips ensure reliable connections to the towers streaming voice and data connections."

    Stuff "ensure reliable". Radio frequency electronics is a prerequisite to any level of radio communication.

  • Report this Comment On February 07, 2011, at 2:24 PM, turkeybird wrote:

    I look for AAPL to buy TQNT.... it makes sense.

  • Report this Comment On February 07, 2011, at 2:45 PM, nonzerosum wrote:

    Can you talk about the tax situation? Looks like earnings were massively inflated last quarter by a tax windfall - will that repeat and if so how long? Also, I noticed a big inventory runup which i hope means good backlog/order pipeline.

    thx,

    tj

  • Report this Comment On February 07, 2011, at 6:27 PM, MichaelHamilton wrote:

    It's a good case but I think it is high enough for now. There are better opportunities in the market.

  • Report this Comment On February 08, 2011, at 8:57 AM, TMFRhino wrote:

    nonsumzero,

    Wouldn't look too much into inventories, if anything they can't move products out the door fast enough right now. The finished goods continue to drop. The tax situation is similar to what CRUS will experience in the current quarter, its a revaluation based on the companies ability to use net operating losses. Its a one time thing. The company gave some guidance on their recent conference call on upcoming tax rates. I don't have the call in front of me at the moment, but I believe taxes were expected to be in the teens during the current year.

    Of course, the larger concern is the loss in Verizon's iPhone. I'll follow up on that with an article today.

    Best,

    Eric

  • Report this Comment On February 08, 2011, at 10:39 AM, prginww wrote:

    Eric,

    I am following your rising star portfolio closely and have benefitted from your purchases such as Cirrus as well as EMC/QCOM - Thanks. This morning Triquent is down about 5%, presumably because TQNT chips have been replaced by Skyworks in the Verizon Iphone.

    Do you think this is a temporary bump and the original thesis is still intact, also you are buying August call options - why not leaps expiring Jan 2012 or 2013.

    Sanat

  • Report this Comment On February 08, 2011, at 11:00 AM, techinsidr wrote:

    Eric,

    Awful article.... $TQNT chips are not in the Verizon iPhone. Stock is down 5% the day after you posted this.

  • Report this Comment On February 08, 2011, at 11:03 AM, TMFRhino wrote:

    Sanat,

    The decision was based on pricing of the August calls versus leaps. In retrospect, with capacity from the Texas fab coming online later this year, the LEAPS might be the more advantaged play. The options component was planned on being less than the outright stock purchase.

    I'll post a follow-up on their non-inclusion in the Verizon iPhone. To be honest, I knew the situation could cause some content loss, but I didn't expect them to miss out on all sockets. Definitely not a "death blow" or anything though. My expectation is that it's in Apple's best interests to keep both companies on their GSM iPhone. With 85% of the world's networks following the GSM ->WCDMA model, its most important to keep the big picture in mind that staying in that iPhone model is the real long-term driver of the company's success in the iPhone.

    Best,

    Eric

  • Report this Comment On February 08, 2011, at 11:05 AM, TMFRhino wrote:

    Techinsidr,

    Bad timing, I agree. I'm not a day trader though, I'll judge my performance over longer periods. Also, you take your lumps investing in semis, win big with CRUS, lose some with another component maker. I'm not looking to be right all the time, that's impossible.

    -Eric

  • Report this Comment On May 02, 2011, at 5:20 AM, rkumar02 wrote:

    Erik with the 1st qtr earnings out do we know if TQNt has made it back into Ipad/Iphone 5?

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