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RF Micro Devices: Post-Earnings Weakness Is a Buying Opportunity

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Radio frequency components maker RF Micro Devices (UNKNOWN: RFMD.DL  ) is down around 19% since releasing its second-quarter results last month. Despite reporting record revenue and tremendous growth, RF Micro's guidance failed to excite investors and the stock has taken a beating.

RF Micro's guidance was on the lines of rival chip maker TriQuint Semiconductor (UNKNOWN: TQNT.DL  ) . TriQuint was punished after its outlook fell considerably short of expectations, and the similarities between TriQuint and RF Micro run deeper considering that both supply their chips to smartphone giants Apple (NASDAQ: AAPL  ) and Samsung. However, TriQuint could make for a good buy after its recent drop as it looks well-positioned to grow in the long run.

Not too bad
RF Micro could turn out to be a good buy as well. The company has been growing at a terrific pace, with revenue jumping 48% year over year to a record $310.7 million in the previous quarter. Adjusted earnings quadrupled to $0.12 per share as non-GAAP gross margin expanded 1 percentage point from the prior year period.

The outlook wasn't way off the mark either. Third-quarter revenue is expected between $310.7 million to $326.2 million, while analysts expected $326.3 million. The company expects adjusted earnings of $0.13 to $0.14 per share, which is actually ahead of the $0.13 per share expectation at the mid-point.

The way ahead
RF Micro's third-quarter guidance wasn't too bad, and a one-time miss shouldn't be given much consideration considering the company's solid growth.

RF Micro's dollar content in flagship phones such as the Galaxy S4 and the iPhone has grown over time. Canaccord Genuity analyst Michael Walkley is of the opinion that RF Micro is now supplying more content to Apple and Samsung's latest smartphones, along with other device makers. Walkley also believes that RF Micro has won the main antenna switch for the iPhone 5s and 5c from Peregrine Semiconductor.  

A look at the teardown of the iPhone 5s reveals that RF Micro won at least three spots in the device. This is good news for RF Micro investors, as the iPhone 5s has been in great demand and helped Apple gain market share in the U.S. in the quarter ended in September. In addition, Apple had a strong order backlog for the iPhone 5s when it reported earnings in late October. Now, demand should ideally increase further in the holiday quarter, and the launch of the iPhone in 35 more countries should help in this regard.

Another tailwind would come from Samsung, which happens to be RF Micro's largest customer and accounted for 22% of overall revenue in the previous fiscal year. Samsung should begin the production of its next flagship smartphone pretty soon if it is to launch it in February-March next year. Hence, as Apple's sales of the latest iPhones wane after the holiday quarter, Samsung could prove to be RF Micro's next catalyst.

Looking ahead, RF Micro expects the switch from 2G devices to entry-level 3G smartphones, along with the deployment of TD-LTE in China, to expand its addressable market two to three times.

In addition, RF Micro's Wi-Fi products are also gaining good traction, as sales increased 49% from the year-ago period. As the world becomes a more connected place, RF Micro's chips should gain more traction as they enable connectivity. For example, the number of Wi-Fi hotspots across the globe is expected to grow 350% by 2015, while the carrier Wi-Fi market is also growing at a good rate. 

What next?
One bad quarter hasn't put paid to RF Micro's long-term prospects. The company has been gaining content at important smartphone suppliers. There is good opportunity ahead on the back of growth in the number of connected devices.

Also, at a forward P/E of just under 9 times, RF Micro looks like a good buy since it isn't too expensive. In fact, it is cheaper than even TriQuint, which trades at a forward P/E of 16 and posted revenue growth of 25% in the previous quarter.

What makes RF Micro even more attractive is the fact that it isn't as exposed to BlackBerry as TriQuint. TriQuint's outlook was way off the mark due to weakness at BlackBerry, but RF Micro guided lower due to a seasonal slowdown in its cable networking business. Also, RF Micro management doesn't expect BlackBerry's troubles to impact it in the future. 

Thus, investors looking for a promising pick for their portfolio at cheap levels should take a look at RF Micro Devices.

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