Qorvo Stock: Anchored To A Lacking Smartphone Market – Sell (NASDAQ:QRVO)

Investment Thesis

It’s been almost a month since Qorvo (NASDAQ:QRVO) reported its fourth quarter of FY2024 results and outlook; since my sell-rating on Qorvo in mid-March, the stock underperforms the S&P 500 by around 20%, as shown below. I’m updating my investment thesis post-earning results to reiterate my sell. I think a lot of the bad news has already been factored into the stock price performance and management’s outlook for the June quarter, but I see more downside risk over the next quarter.

The company reported March sales of $914 million compared to the consensus expectations, which were slightly higher at $925 million. I take Qorvo’s Advanced Cellular Group sales as a gauge for the company’s risk-reward scenario, and it is because of the lack of smartphone demand this year that I’m less optimistic about Qorvo for 2024.

Total sales declined 12% quarter-over-quarter to $941 million compared to consensus expectations at $925 million. The company’s largest segment, Advanced Cellular Group, declined 23% quarter-over-quarter to $654 million due to weaker demand from the star of the smartphone market, Apple (AAPL)(AAPL:CA). Even Apple’s results this quarter failed to impress me. I think even though the market reacted well, with Apple trading higher after the results and news of the buyback, the results indicated no actual end demand recovery, which makes me substantially less optimistic about Qorvo’s near term performance. Just to put into perspective how exposed Qorvo is to the smartphone market, it should be noted that for FY2024, Apple accounted for 46% of total sales and 37% in FY2023 and Samsung accounted for 12% of total sales in both years, respectively. This is not to mention the additional risk Qorvo faces from competition in the 5G market against Qualcomm (QCOM) and Huawei among others, which management touched on this quarter.

Keep in mind that Qorvo’s other segment sales grew; high-performance analog sales were up 38% quarter-over-quarter, and connectivity and sensor group sales were up 13% quarter-over-quarter. Still, I don’t think the other segments’ growth (although double-digit) is relevant for Qorvo’s performance as long as its advanced cellular group sales remain soft. And I think management would agree with me, given their outlook.

The company is guiding sales to decline another 10% quarter-over-quarter next quarter, which would be 1QFY2025, to $850 million, way lower than consensus at $925 million. In particular, management expects advanced cellular sales to decline 8-9% quarter-over-quarter because of weaker demand from Apple and flat demand from China’s Android market. So, this reconfirms my pessimism when it comes to Qorvo’s near-term performance, specifically the company’s performance over the next 1-2 quarters. Management still expects the smartphone total addressable market or TAM to grow by single digit percentage year-over-year and the 5G market by around 10% year-over-year for 2024.

What could go wrong?

There is an argument to be made that the stock is attractive at current levels because management has guided so negatively for the next quarter. Aside from the forecasted decline in its advanced cellular sales, management also forecasts a decline in high-performance analog sales (by 11-12% quarter-over-quarter) and flat sequential growth for connectivity and sensor sales. The bad news is recognized by management and the market. Why am I still bearish? I think there is limited upside this year as I cannot see any near-term catalyst that could potentially reverse the situation for 2024 to revive the smartphone end demand. I think other players with similar exposure, like Skyworks (SWKS), indicate the same. I also think part of the disappointment this quarter was based on the fact that the market was positive on smartphone recovery for 2024 since the second half of last year and, in turn, already priced in some of that optimism. So, I think the results will continue to disappoint for the near-term.

Valuation

Qorvo’s stock is undervalued, based on a relative methodology of valuing stocks within the company’s peer group. The stock trades at a Price/Earnings ratio of 16.3, while the peer group average ratio is much higher at 31. The same applies to the EV/Sales for CY2024. The stock trades at a ratio of 2.7 compared to the average ratio of 7.1, as shown in the table below, generated with data from Refinitiv. The valuation is attractive compared to companies within the peer group with similar exposure to the smartphone market and Apple, mainly Qualcomm and Skyworks, but I don’t think the valuation is enough reason to buy the stock on weakness if there’s no catalyst in sight for the near-term to boost growth. My expectation for a lack of growth during 1H24 played out, and now I expect to see the same for the rest of 2024.

What’s Next?

I think Qorvo will continue to struggle to grow its top-line in the near-term, specifically over the next 1-2 quarters. I do expect to see more of an actual recovery in 2025 as smartphone TAM is estimated to grow more substantially year-over-year, and management ties the 2025 growth in end demand to an expectation of growth in sales to Apple during FY2025 and FY2026. I would advise investors to keep an eye on Apple’s results next quarter and Qorvo’s advanced cellular group sales to better pinpoint the moment of recovery and jump in ahead. I don’t see this turnaround moment taking place in 2024, although I do think the stock would be more attractive if it dips closer to its 52-week-low of ~$80.62. The reason I don’t see this moment playing out this year is not only due to weak orders from Apple but also due to the inventory cycle weighing on Qorvo’s margins. The company’s non-GAAP gross margins declined to 42.5% this quarter and are expected to drop again next quarter to the range of 40-41% because of a higher mix of high-cost inventory. I expect Qorvo to be an underperformer of the peer group to an in-line performer at best for the year.