Apple component supplier Qorvo (QRVO 1.79%) has underperformed the broader market in 2023 so far, recording gains of just 17% compared to the Nasdaq Composite's gains of 33%. But that may be about to change, the chipmaker's fiscal 2024 first-quarter results indicate.
Qorvo released its fiscal 2024 first-quarter results (for the three months ended July 1) on Aug. 2. The company's revenue and earnings were way better than what analysts were anticipating. More importantly, Qorvo delivered outstanding guidance for the current quarter that points toward a terrific sequential acceleration in its revenue.
It won't be surprising to see this underperforming semiconductor stock step on the gas in the second half of the year. Let's look at the reasons why that may be the case.
Qorvo's guidance indicates that the worst may be over
Qorvo's fiscal Q1 revenue fell an alarming 37% year over year to $651 million last quarter, while adjusted earnings fell to $0.34 per share from $2.25 per share in the year-ago period. Though these numbers were better than Wall Street's expectations of $0.15 per share in earnings on $640 million in revenue, the steep declines in Qorvo's metrics indicate it has been hit hard by the slowdown in smartphone demand.
Qorvo management blamed inflated chip inventories at Android smartphone original equipment manufacturers (OEMs) for the terrible performance. The company has been forced to ship a lower number of smartphone chipsets on account of the ongoing inventory correction in the market, which is a result of a decline in smartphone shipments.
According to market research firm IDC, global smartphone shipments fell 8% in the second quarter of 2023 compared to the prior-year period. But the good part is that the decline slowed compared to the first quarter when the year-over-year drop was almost 15%. IDC expects the smartphone market to start growing from the end of 2023 and continue its recovery in 2024.
That's good news for Qorvo as it relies heavily on the smartphone market. In fiscal 2023, Qorvo's cellular business produced two-thirds of its total revenue. What's more, Apple was its largest customer, accounting for 37% of the company's top line. So, a recovering smartphone market combined with Qorvo's reliance on Apple is going to be a big tailwind for the company in the coming year.
Apple is set to launch its next generation of iPhones next month. Wedbush Securities analyst Dan Ives believes that Apple's new smartphone lineup could encourage owners of 250 million iPhones, who haven't been upgraded in at least four years, to buy the new devices. That would point toward a double-digit jump in Apple's iPhone sales following the launch of the new smartphones as the company has sold 222 million units in the past four quarters.
At the same time, Qorvo claims it has been gaining more chip content at its largest customer. So, there is a possibility that it could be getting more revenue from each unit of the new-generation iPhones that Apple manufactures. All this points to why Qorvo guided strongly for the current quarter.
The company expects $1 billion in revenue in the current quarter at the midpoint of its guidance range. That's a big jump -- more than 50% on a sequential basis -- and is well ahead of the $960 million consensus estimate. Qorvo's adjusted earnings estimate of $1.75 per share for the current quarter is also higher than the $1.62 per share that analysts forecast.
But don't be surprised to see Qorvo's actual numbers exceed the guidance on account of improving conditions in the broader smartphone market and a healthy upgrade cycle for Apple. Moreover, Qorvo management claims that the company is gaining content at Android smartphone OEMs as well, driven by the growing adoption of 5G devices.
Qorvo estimates that 45% of Android devices will be 5G-enabled by the end of this year. Not surprisingly, the chipmaker expects sales of 5G-powered Android smartphones to increase at a double-digit compound annual growth rate (CAGR) in the long run. This growing adoption of 5G Android devices ideally expand Qorvo's serviceable addressable market as, according to the company, each 5G smartphone carries an extra $5 to $7 worth of radiofrequency (RF) chips that it sells.
Why now looks like a good time to buy the stock
Analysts are expecting Qorvo's top line to remain flat in the current fiscal year at $3.6 billion. For comparison, the company's revenue fell 23% in the previous fiscal year. We have already seen why the company is capable of outpacing analysts' expectations in the current fiscal year. The good part is that Qorvo is expected to return to double-digit revenue growth from next year.
QRVO Revenue Estimates for Current Fiscal Year data by YCharts
Even better, analysts are expecting Qorvo's earnings to increase at an annual rate of 10% for the next five years. That would be a nice improvement over the negative earnings growth that the company has witnessed in the last five years. As the following chart suggests, Qorvo's bottom line is set to accelerate big-time following this year's anticipated drop of 15%.
QRVO EPS Estimates for Current Fiscal Year data by YCharts
Qorvo trades at 21 times forward earnings, which represents a nice discount to the Nasdaq-100's forward earnings multiple of 29. Buying Qorvo stock at this relatively cheap valuation looks like a good idea given the potential earnings growth on offer. Assuming Qorvo does deliver $10.05 per share in earnings in fiscal 2026, its stock price could jump to $211 after three years based on its forward earnings multiple.
That would be nearly double Qorvo's current stock price, which is why investors looking for a growth stock trading at an attractive valuation should consider buying this chipmaker before it takes off.
