RF Micro Devices (NASDAQ: RFMD), an RF component supplier to the smartphone industry, has made investors in the company happy this year. The stock has risen roughly 135% year to date, and an extremely positive earnings report along with a few other catalysts could mean further gains in the future. However, there are still plenty of risks facing RF Micro, and any one of these could stop the stock's rise in its tracks.
Losing a big customer
During fiscal 2014, 25% of RF Micro's total revenue was derived from Samsung, by far the largest seller of smartphones worldwide. In second place was Apple, through contract manufacturers, at 20% of total revenue. No other customer accounted for more than 10% of RF Micro revenue for the year.
With 45% of revenue coming from Samsung and Apple, RF Micro could face serious problems if it lost business from either company. Given RF Micro's recent strong results and guidance, along with teardowns of the new iPhones, there doesn't appear to be anything to worry about in the near term, with both RF Micro and merger partner TriQuint well represented in the iPhone 6. However, there's no guarantee that RF Micro will keep this business in subsequent years, and that poses a huge risk to the company.
Apple reportedly sold 10 million iPhones during the weekend launch of the iPhone 6 and iPhone 6 Plus, beating the 9 million mark the previous generation of iPhones set. That's great news for RF Micro, as it suggests that sales of iPhones aren't going to stop growing anytime soon. However, depending so heavily on the iPhone could be a disaster waiting to happen for the company.
The falling price of smartphones
Much like how the average price of PCs has been continually declining over the past decade, the average price of smartphones is declining as well. IDC estimates that smartphone average selling prices will decline from $314 in 2014 to $267 in 2018, with large declines in the cost of Android and Windows Phones leading the way.
The combination of falling prices and slowing unit growth, which is already occurring in mature markets, will make it more difficult for component suppliers to turn a significant profit. In the PC industry, there are really only two companies that are able to consistently generate above-average profits -- Microsoft and Intel. These companies are able to do so because their products are, for the most part, irreplaceable. The enormous ecosystem around Windows makes the OS extremely difficult to displace, and Intel's manufacturing and R&D advantage over AMD guarantees a dominant market share.
RF Micro's products are replaceable, given all of the competition, and as the price of smartphones gets driven down, manufacturers will be looking to cut component costs as much as possible. The double-digit operating margins that RF Micro managed in its most recent quarter may not be sustainable in the long term, and that could ultimately hurt the stock price.
Competition from Qualcomm
RF Micro has plenty of competition, from Skyworks Solutions to Qualcomm, the leading apps processor provider. Last year, Qualcomm entered the RF front-end market with the RF360, a product that put it in direct competition with RF Micro. While Qualcomm's entry into the market hasn't had much of an effect so far, Qualcomm's vast R&D and resource advantages should be sources of worry for RF Micro.
RF Micro's merger will TriQuint will help it be more competitive, but the specter of Qualcomm may be too much to overcome in the long run. RF Micro has a spotty record of profitability over the past decade, with large swings year to year, and while the most recent quarter was a good one for the company, competition could prevent RF Micro from becoming consistently profitable. That could be bad news for the stock price.
Final thoughts
RF Micro, both the stock and the company, has been performing well as of late, but there are significant risks that could reverse this trend. Overdependence on a small number of customers, the commoditization of smartphones, and competition from Qualcomm could all put a damper on profitability and the stock price in the long term. Investors should be aware of these risks before considering an investment in RF Micro.
