Qorvo Investors Shouldn’t Miss the Big Picture

Investors didn't waste any time expressing their disappointment after Qorvo's (QRVO -3.09%) fourth-quarter 2018 results came out. The chipmaker failed to offer strong guidance for the current quarter, which was enough to blind investors to the fact that it did well to turn its business around to some extent in the previous quarter.

Analyst Blayne Curtis of Barclays tried defending Qorvo's weak outlook. He stated that the company would struggle in the current quarter thanks to a light smartphone production environment, but growth would be back once Apple and Samsung -- Qorvo's key customers -- start ramping up production in the second half of the year.

Curtis could be right, as Qorvo has reportedly landed a new contract at Apple that could boost its business substantially later this year. But this isn't the catalyst that Qorvo investors should be fixated on. Instead, the company's newly found focus on markets beyond mobile is becoming its growth engine that investors shouldn't overlook.

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Nonmobile is becoming a bigger part of Qorvo

Qorvo still relies on mobile products for the bulk of its revenue, but it is witnessing a change in the revenue mix. For the most recently reported quarter, mobile supplied nearly 75% of Qorvo's top line, but this had dropped from 79% in the same period a year ago. Qorvo's mobile revenue was down close to 5% year over year in the fourth quarter.

Still, Qorvo's top line increased 3.4% year over year thanks to the improving traction of the company's infrastructure and defense products (IDP) business, which grew an impressive 26%. The solid growth in IDP is attributable to a few catalysts, such as Qorvo's growing clout in smart homes, 5G deployments, and the Internet of Things (IoT).

Qorvo posted record smart-home revenue last quarter by scoring design wins across several providers of meshed Wi-Fi home networking systems -- a technology that allows different devices to piggyback off one another as seperate nodes which spreads the users Wi-Fi signal further. Wireless mesh is a fast-growing space that's expected to double in value over the next five years. It will be crucial in enabling smart-home systems, so Qorvo is busy striking key partnerships in this space. D-Link, for example, has partnered with the chipmaker to develop a couple of solutions to extend the Wi-Fi coverage in a smart-home setting.

Qorvo's IDP business has another serious catalyst in the form of fifth generation (5G) wireless networks. Networking giant Cisco estimates that 5G deployments will grow tremendously in the coming years, with the number of connections jumping to 25 million in 2021 from just 2.3 million in 2020.

Qorvo is using its leadership in gallium nitride (GaN) technology to tap this opportunity. GaN is a chemical compound used in making radio frequency (RF) components that enable connectivity across a wide range of devices. It is expected to be crucial in 5G base stations thanks to its reliability, the ability to operate at high temperatures, faster connection speeds, and high data transfer capacity.

Qorvo has already launched a couple of industry-first chip platforms over the past year and is participating trials and demonstrations with carrier partners. Although 5G deployment is still a couple of years away, Qorvo's early moves could be advantageous in the long run given the massive growth expected.

Margins get a shot in the arm

The smartphone chip market is a hugely competitive and crowded space. There are many RF component suppliers already fighting for a piece of the action, including big names like Qualcomm, Broadcom, and Skyworks Solutions, among others. As a result, a chip war has been brewing in the smartphone space, which has led to lower pricing of several chip components, hurting margins in the process.

This is probably why Qorvo has failed to increase margins over the past three years despite robust top-line growth.

QRVO Revenue data by YCharts. TTM = trailing 12 months.

However, for Qorvo some of the margin pressure from the Smartphone market is being offset by the growing contribution of the IDP business in recent quarters.

Source: Qorvo quarterly filings.

Qorvo's margins should keep improving, as the company is witnessing strong design-win momentum in the nonmobile business, as well as in high-value content in the smartphone space. In fact, management expects to see 10% to 15% growth in design-win activity this year, so it won't be surprising to see the company hitting its 50% gross margin target, which it expects to achieve by the second half of the current fiscal year.

Investors might have jumped the gun

Qorvo still gets a majority of its business from mobile, and any hint of weakness there spooks investors. They didn't waste any time in hitting the "sell" button when Qorvo guided for earnings of $0.75 per share on revenue of $655 million; both figures were well below Wall Street's estimate for $678 million in revenue and EPS of $1.08.

But, as mentioned earlier, the mobile business is set for a strong boost later this year. An executive in Qorvo's mobile business remarked in February that the company is set for the "largest actual generation-over-generation content increase we have seen, driven by many product categories." Such an ambitious statement led analysts to believe that this massive contract win could enhance the chipmaker's revenue by 18% this year.

Throw in the improving traction of the nonmobile business, and there was no reason for investors to engage in panic selling. Qorvo looks all set to make a strong comeback, driven by its multiple catalysts.