When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons and decide whether it's possible upside outweighs its risks. Let's take a look at RF Micro Devices (NASDAQ:RFMD) today, and see why you might want to buy, sell, or hold it.
Founded in 1991 and based in North Carolina, RF Micro Devices is a semiconductor company specializing in radio frequency (RF) components and technologies. Its offerings enable and support mobile connectivity and communications. The company has a market capitalization of about $1.3 billion, and its stock is up about 4% over the past year and down 3.3%, on average, annually over the past decade.
The first thing to like about the company is the company it keeps. It's supplying technology for products that are proliferating rapidly -- very rapidly. We're talking phones and smartphones and tablets, for example.
Not all the numbers in its financial statements are appealing, but some are. Its long-term debt has fallen sharply, from more than $600 million in 2008 to just $119 million recently. It's not cash-poor either, with its cash and short-term investments coffers recently holding $300 million. Given that it's been free-cash-flow positive for several years in a row now, that bodes well for its health.
Meanwhile, while many mobile device suppliers have their fortunes very tied to Apple (NASDAQ: AAPL), RF Micro Devices is less tied to it, though it does supply products such as the iPhone 5. Instead, the company is a major supplier for Nokia (NYSE:NOK), which has found success providing less developed economies with less expensive mobile phones. This is broadening RF Micro Devices' customer base. (Nokia may be in trouble, though, as smarter phones gain traction and its market share in China is shrinking.)
RF Micro Devices's Wi-Fi business is expected to grow strongly. In its last quarter, it topped analyst expectations and posted a shrinking loss.
Warren Buffett has long offered a good reason to sell stocks such as RF Micro Devices: He avoids companies that are outside his circle of competence, and companies where he can't comfortably predict how they'll be doing in five, 10, or 20 years. He's confident, for example, that people will still be drinking sodas in a decade, but the fortunes of firms in the fast-changing technology arena are much murkier.
Indeed, while RF Micro Devices' offerings have often complemented those of Qualcomm (NASDAQ:QCOM), with mobile device makers buying supplies from both, Qualcomm has recently launched a new chipset that manages older and newer wireless standards (such as 4G LTE) and includes front-end signal processing, power management, and radio band tuning. In other words, it may eat RF Micro Devices' lunch, along with the lunches of several other players, such as Skyworks Solutions (NASDAQ:SWKS). Presto! RF Micro Devices' future suddenly looks different, or at least less certain, which was why its shares dropped some 15% on the news. An analyst at Lazard saw that drop as an overreaction, though, and upped his rating for the company to buy.
Other Wall Street analysts have been finding things to like about the company, with Topeka Capital in January rating it a hold and citing its increasingly diverse customer base and new products. In February, Oppenheimer analysts rated it to perform along with the market (i.e., not outperform it) and didn't see the company growing fast enough to justify its valuation. Notice that those aren't buy ratings, though the stock does sport some of those, too.
The Wall Street ratings are largely tied to the stock's valuation, featuring a forward P/E of 18 and a current P/E that's negative, due to RF Micro Devices having net losses instead of net gains. On a more reasonable note, its price-to-sales ratio is just 1.6, which is far from nosebleed territory. The company's revenue and earnings have surged and dipped, recently dipping. Its free cash flow has also been shrinking.
Given the reasons to buy or sell RF Micro Devices, it's not unreasonable to decide to just hold off on it. You might want to wait for the company to move back into the black or for Nokia's fortunes to seem more clearly promising. You might simply wait for a lower price at which to buy to provide a margin of safety, though the stock price is already in penny stock territory, where many investors have lost fortunes.
You might also check out some other interesting related companies, to see if they seem like better bargains than RF Micro Devices. Perhaps take a look at China Mobile (NYSE:CHL), the world's largest mobile carrier, which has huge growth potential, given the country's relatively low mobile phone penetration. It seems reasonably valued, with a P/E below 11 and a forward P/E of just 8.5. The company's leader is worried about threats from apps such as Skype, though.
I'm holding off on RF Micro Devices for now. Everyone's investment calculations are different, though. So do your own digging and see what you think. The company may perform spectacularly in the coming years, but remember that there are plenty of compelling stocks out there.
Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, owns shares of Apple and Qualcomm. The Motley Fool recommends and owns shares of Apple. It also owns shares of China Mobile and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.