The semiconductor industry is only just beginning to come out of a widespread slump -- primarily from an overhang of PC and smartphone chip supplies following a consumer spending boom early in the pandemic, as well as lower enterprise computer sales in 2022.
Nevertheless, the industry has been prepping for an explosion in chip demand. According to industry research from SEMI.org, equipment spending for new wafer fabs (facilities that manufacture silicon wafers, which get cut into chips) will hit new records in the next few years through 2026.
But one company is moving in a different direction: Qorvo (QRVO 1.79%). It just announced it's selling its chip manufacturing facilities in China as it looks to get itself in better financial shape in the years to come. With Qorvo shaking things up, is it now a buy for 2024?
Shrink now, grow later
Qorvo is an integrated device manufacturer (IDM), a company that both designs and manufactures chips. It's the product of a "merger of equals" back in 2015 between the two chipmakers RFMD and TriQuint. The idea behind the consolidation was to create a leaner (more profitable) chipmaking powerhouse focused on radio frequency, power, and other mobile chips and sensors.
As I pointed out back in September, the benefits of this merger have never really panned out. I posited that Qorvo's sprawling manufacturing footprint isn't being efficiently used, and perhaps some of its underperforming facilities should be sold off to bolster profit margins (Qorvo has mostly lagged behind its peers in basic profit metrics).
A deal was certainly already in the works long before I wrote this, but sure enough, Qorvo just announced it is selling its two chip packaging facilities in Beijing and Dezhou, China. Chip packaging is the final step in which chips are tested and installed onto a circuit board, before getting installed into a computing or electronics system. It tends to be a highly commoditized step with below-average profit margins compared to wafer manufacturing (Qorvo will retain its wafer fabs in North Carolina, Oregon, Texas, and Florida, as well as its other assembly and test facilities in Costa Rica, Philippines, and Germany).
This is a good first step for Qorvo to finally get its sprawling manufacturing operations right-sized for customer demand. And as for its facilities in China, they are being bought by Luxshare Precision Industry, a big contract manufacturer used by the likes of Apple for some of its products. Qorvo will retain use of these facilities to assemble its chips, but will offload the expensive management of day-to-day operations to Luxshare. The deal should be finalized by mid-2024.
The final sale price was not disclosed, but no doubt we'll get some details from Qorvo's financial reports next year. Interestingly, the Dezhou facility was the latest one Qorvo built, finished up in 2016. It was likely a painful decision, but one that will be key to Qorvo scaling profitably going forward.
It's making tough decisions, and that's a good thing
Of course, another tailwind could be getting ready to blow in Qorvo's favor next year. The smartphone market has been in a slump since late 2022, but chip inventories are normalizing. That could pave the way for the next leg up for the company's revenue -- not to mention the expected overall industry boom over the next few years. However, some temporary weakness in other markets, like automotive chips, could offset some of this progress in the first half of the new year.
Data by YCharts.
There's thus a long road ahead to recovery, but the market could be pleased with even a hint of positive momentum at this point. Qorvo stock is still down over 40% from all-time highs reached in 2021, and trades for just 14 times Wall Street analysts' expectations for next year's earnings. This could be a cheap stock, especially once Qorvo rounds the bend on turning a profit again.
If you like uncovering undervalued stocks, Qorvo could be a semiconductor company worth doing some digging on. 2024 could be a good year for the business after its China chip assembly sale in an attempt to shore up its bottom line.
