"Mature chip" manufacturing handles the production of semiconductor chips that aren't the latest and greatest used in high-end smartphones, artificial intelligence (AI) servers, and the like. Normally, this sector segment is somewhat boring for investors.
The chip market is anything but normal at the moment.
Mature chipmaking is boring normally because lots of competition makes it hard to get an edge. And until recently, the sector was also in a downturn related to slowing PC sales. But megatrends around electric vehicles (EVs), autonomous driving, factory robotics, and the connectivity of everything point to some massive increases in future demand.
One smaller manufacturer that underperformed in recent years is Qorvo (QRVO 1.79%). It's trying to make a big comeback, and some investors might be tempted to bite. Here's what you need to know.
Qorvo's business is small, but it's diversified
Qorvo is the result of a 2015 "merger of equals" between RF Micro Devices and TriQuint Semiconductor. The deal created what was hoped would be a new powerhouse in manufacturing of radio frequency (mobile connectivity) chips and related analog chips.
Today, the company reports in three primary segments:
- High-performance analog (HPA): Radio frequency and power management chips for autos, aerospace, and mobile and internet infrastructure. The competitor list for the segment reads like a who's who in chipmaking, including Analog Devices, Infineon Technologies, NXP Semiconductors, ON Semiconductors, STMicroelectronics, Texas Instruments, and Wolfspeed.
- Connectivity and sensors group (CSG): More connectivity that spans things like Bluetooth, Wi-Fi, and other sensor types. Along with some of the names above, competition here also includes Broadcom, Nordic Semiconductor, Qualcomm, Silicon Laboratories, and Skyworks Solutions.
- Advanced cellular group (ACG): Mobile tech sales to manufacturers of smartphones, tablets, wearables, and other mobile devices. Broadcom, Qualcomm, and Skyworks Solutions are listed as top rivals.
There would appear to be ample synergies between Qorvo's two merged businesses. However, since 2015, the synergies haven't come together and it's been rough going for this global manufacturer. Every time progress is made in growing the business to a new scale and higher profit margins, some global event sends the business back toward those 2015 levels. These events include the start of the U.S.-China trade war in 2018, the pandemic, and a sharp downturn in smartphone and consumer electronics sales in 2023.
The stiff competition certainly doesn't help. When compared to a sampling of similarly sized peers listed above, Qorvo lags behind in profitability metrics.
Data by YCharts. TTM = trailing 12 months..
Also notable is that Qorvo made numerous small bolt-on acquisitions over the years to diversify its business away from connectivity. One of these was the purchase of small manufacturer United Silicon Carbide (SiC) as a bet on EVs. SiC is a semiconductor material made of silicon and carbon that can handle high voltages and heat, and the acquisition gave Qorvo access to the fast-expanding industry for EV and other next-gen power chips.
In 2022, Qorvo followed this up with a SiC wafer supply agreement with SK Siltron, a subsidiary of the giant South Korean tech conglomerate SK Group (which also owns memory-chip giant SK Hynix).
To date, these diversifications haven't fixed underlying issues with profit margins and lack of sustained growth.
No quick fix in sight
During its latest financial update (the fiscal 2024 first quarter ended on July 1), management said that elevated inventory of some chips will continue into calendar year 2024. This doesn't look like it will be a quick turnaround story.
In the meantime, Qorvo seems to have nagging issues related to too much manufacturing capacity, and too few chips to make. The company reported an 8-percentage-point fab underutilization, which is the reason gross profit margin plummeted to just 35% last quarter. During the three months ended in April 2023, gross margin was just 18%, a pretty dismal gross margin.
There are two ways I'm looking at this situation:
- Qorvo is in line for massive profit-margin expansion in the coming years if demand for connectivity chips heats up with a rebound in smartphone and consumer electronics spending, as well as a ramp-up in demand for SiC chips related to EVs.
- Alternatively, Qorvo needs to admit its expenses are due for a cut. This could include selling underperforming chip fabs to peers that need to expand manufacturing capacity right now, something that peer ON Semiconductor has embarked on in the last couple of years under its new management.
Given Qorvo's performance since the big merger eight years ago, it might be time to take a look at option No. 2. Some drastic measures to right-size the manufacturing based on current needs could be the best way forward for the company. And until that happens, I'm unsure this semiconductor stock can meet or beat the average performance of its industry peers over the long term.
That being said, Qorvo management expects a dramatic rebound in the coming quarters as some of the deep industry slump starts to ease. The stock could be poised for a short-term rip higher if the company delivers.
If you're a long-term investor, though, Qorvo stock might need too much babysitting at this point to warrant a buy. I'm personally in wait-and-see mode.
