A Few Reasons To Stay Away From RF Micro Devices

Two companies who manufacture radio frequency (RF) chips couldn't be more different right now. Last week was a picture of contrasts as we saw Skyworks Solutions come out with flying colors in its earnings, followed by archrival RF Micro Devices (Nasdaq: RFMD  ) biting the dust in the third quarter.

So, where exactly did RF Micro Devices go wrong when its industry mate did it so right? And is there any reprieve for the company in sight? Let's take a look.

Missing out on the moolah
The radio frequency chips which RF supplies enable wireless communication in mobile devices.  Given the robust demand for smartphones and tablets, I expect the radio frequency chip market to grow in leaps and bounds. All you need is a significant share in the books of major handset makers. However, this is exactly where RF comes up short.

Although RF's clientele includes handset makers such as HTC, Huawei, Motorola, and Research In Motion, among others, its share of the pie is small and it cannot seem to generate enough revenue out of them. RF is also missing out on the smartphone boom, which is a huge cause for concern.

Look out, RF!
Apart from this, there are two more areas which I think the company should look to set right. RF hasn't diversified its business enough, as its competitor Skyworks has done, both in terms of geography as well as product range. The company depends way too much on the Chinese cellular market, which comprises more than one-third of its revenue. China's wireless market is currently experiencing weakness in demand pulling down revenue numbers for RF. The company needs to scout for more opportunities in emerging markets.

Also, the company supplies its chips mostly for phones, and hasn't ventured into products such as LEDs or tablets, which are viewed as the major revenue churners these days. Time to gear up, I say.

Saving some face?
However, all is not lost. The company's chips have found a way into Samsung's phones by being featured in the latest Galaxy Nexus. In addition to this, the company also bagged a few more deals with smartphone major HTC, who have used their chips in their latest Windows phones. But I am not reading too much into that as the Windows Phone platform is yet to take off like Android or iOS.

The Foolish bottom line
RF projects revenue way below Street estimates for the ongoing quarter, evidence that the company seems jittery about its future revenue prospects. I would like to see a decent quarterly report before taking a call on RF.

I will keep a tab on this company from the sidelines and look for signs of a turnaround. I suggest even you do the same by adding RF Micro Devices to your Watchlist so that you don't miss out on a booming radio-frequency stock play. 

Fool contributor Harsh Chauhan owns none of the stocks mentioned in the article.  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.


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