Wall Street analysts were quick to draw the knives after Qorvo's (QRVO +8.90%) fiscal second-quarter results, reported Nov. 1, as the chipmaker continued its trend of giving weaker-than-expected guidance. Not surprisingly, the stock was subjected to ratings downgrades by at least six analyst firms.
Qorvo investors should have seen this negative sentiment coming as the company has been consistently facing challenges in the smartphone space because of intense competition from rivals. Instead, investors chose to bid up the stock, apparently in the hope of windfall gains from Apple's (AAPL +0.30%) new iPhones even as the chipmaker's business was declining.
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But a closer look at the latest financials indicates that Qorvo's luck might have run out, and it is high time investors start booking profits after the stock's 40% jump this year. Let me explain why.
The problem at Qorvo
Qorvo tried painting a pretty picture by saying that its mobile products revenue grew 38% sequentially to $630 million last quarter thanks to Apple's iPhone production ramp and strong Chinese demand. But this doesn't change the fact that this business was better off last year with $706 million in revenue.
In fact, Qorvo's mobile business was in fine form last year thanks to the design wins it was landing in both premium and mid-tier smartphones. But the scenario has changed and the company's business has taken a turn for the worse as shown in the chart below looking at revenue, gross profit margin, and stock price.
Qorvo has fallen prey to rising competition in the radio frequency chips space, as evident from the company's latest guidance. In the third quarter, the chipmaker expects $840 million in revenue at the midpoint and earnings per share of $1.60, whereas analysts were expecting guidance of $893 million and $1.74. What's even more alarming is that Qorvo's top line would remain almost stagnant on a year-over-year basis.
This is bad for a company that gets 35% of its revenue by supplying chips to Apple. Qorvo bulls could blame the company's tepid outlook on reported iPhone production problems. But such a possibility doesn't hold much water considering Cirrus Logic's latest results. Apple supplies 82% of Cirrus' revenue, and the company's December-ended quarter outlook calls for a revenue increase of 5% at the high end of its guidance range.
This is impressive considering Cirrus wasn't expected to land any new content inside the new generation of iPhones, so the company was primarily dependent on Apple's manufacturing output. However, the addition of another model in the form of the iPhone X turned out to be Cirrus' saving grace, giving the chipmaker another avenue to increase volume shipments.
Finally, Cupertino's latest quarterly results and the accompanying outlook for the final quarter of the year have put any concerns about iPhone production problems to rest. Apple blew past expectations and is on track to record 9% year-over-year growth in revenue in the December-ended quarter, which wouldn't have been possible if it was indeed facing production issues.
This means that Qorvo has a different problem as a fellow iPhone supplier and Apple itself are on track to increase revenue in the holiday quarter.
Qorvo is losing ground to rivals
This problem isn't too difficult to pinpoint as Qorvo reportedly hasn't gained new business from the latest iPhones. According to iFixit's teardown of the iPhone 8, Qorvo is supplying the same two chips to Apple as it did last year, while rival Skyworks Solutions reportedly has four chips.
But the teardown of the more premium iPhone X indicates that Qorvo hasn't found a place in the device. By comparison, Skyworks has four chips in this new iPhone, while Broadcom has supplied two power amplifier modules along with the wireless charging module. Therefore, Qorvo's rivals have dominated Apple's flagship device, and this is the reason why the chipmaker has issued a gloomy forecast for the December-ended quarter.
Hence, Qorvo isn't in line to record any windfall gains from the new set of iPhones. The iPhone X is turning out to be hugely popular among consumers as it quickly sold out once it went on sale. Moreover, Apple has brought down the delivery times of the device to three to four weeks from the prior five to six weeks, indicating that it is ramping up production.
This is bad news for Qorvo investors as the chipmaker seems all set to miss the iPhone X gravy train. So, investors should consider booking their profits as any iPhone-related gains that they were expecting won't probably materialize.
