The Stock To Watch In 2017 - Part 2

(RTTNews) - Why we like Qorvo, Inc. (QRVO)?

Investment Thesis *Futuristic solutions for a diverse customer base *Leading the GaN transition *SAW& BAW Filters to navigate connectivity challenges for a growing number of mobile devices *Fulfilling the 5G promise *Customer-centric business model *Outlook

*Futuristic solutions for a diverse customer base

Qorvo provides core RF solutions to accelerate the development of mobile devices, next generation communications, network infrastructure, and radar and avionics systems. It caters to a diverse base of customers providing mobile, infrastructure and aerospace/defense applications.

*Leading the GaN transition

GaN or Gallium Nitride is projected to be the preferred technology in the defense industry, as the sector switches to the development of smaller and more powerful radar and Electronic Warfare (EW) solutions. Qorvo leverages its expertise in GaN to help manufacture products with the size, reliability, and high efficiency needed for more robust performance, lower maintenance and longer operational lifetimes. The company provides strategic foundry services and products to support U.S. Department of Defense (DoD) programs including airborne radar on the F-15, F-18, F-22 and F-35.

On the commercial side, GaN is being deployed in cellular base stations and many high power applications, as it provides significant cost improvements. Qorvo is accelerating the development of key wide-bandgap (WBG) semiconductor products based on its GaN technology to jumpstart the next generation of smaller, faster, cheaper and more efficient devices to be used in consumer electronics, electric vehicles, renewable power interconnection, industrial-scale variable speed drive motors and a smarter, more flexible energy grid. The company expects GaN to grow at over a 20% CAGR for the next few years.

*SAW& BAW Filters to navigate connectivity challenges for a growing number of mobile devices

The increasing rollout of 4G/LTE base stations is expected to drive the need for filters exponentially. As mobile devices continue to grow, band guards continue to shrink within the crowded RF spectrum. This is where filters come into play to improve connectivity and user experience. Qorvo offers the SAW, BAW and TC-SAW filters for handset designers to navigate filtering challenges, in order to meet added band and frequency requirements in smartphones and Wi-Fi systems.

*Fulfilling the 5G promise

The next generation network '5G' is in the works with commercial launch scheduled for 2020. The 5G network is expected to offer significant advantages, including 100 times network energy efficiency and 20 Gbps peak data rates. Qorvo believes it is well positioned to deliver a broad range of 5G connectivity solutions. The company says it is actively involved with global network providers in more than 20 5G field trials to prepare for the rollout of initial networks by 2020. Qorvo also projects GaN as a critical technology to achieve 5G performance objectives at vastly improved energy efficiency.

*Customer-centric business model

In Q2, the company took a hit to its gross margins to "protect long-term customer relationships". Qorvo said it did everything it could to assure supply of high-quality material to the customer and that impacted the gross margins.

Non-GAAP gross margins for the September quarter declined to 42.8% from 48.2% in the previous quarter, and from 49.7% a year ago, well below the company's own expectations of 47%. The chipmaker cited "lower than expected manufacturing yields during a steep product ramp to a large customer" as the reason for the sharp fall, and acknowledged that it had to work on its gross margin.

"To protect our long-term customer relationships, we did everything we could to assure supply of high-quality material to the customer while working through the internal yield issues [resulting in a great many modules that needed to be scrapped at the finished good level], and this significantly impacted our gross margin," noted president & CEO Bob Bruggeworth, adding that new die-level screens are targeting the issue and working effectively.

Although, this was a near-term bump, the company put the customer first. That says something about the integrity of its business model.

*Outlook

Although, the outlook for third-quarter revenue and earnings per share was below the consensus estimate, both figures were still higher than year-ago numbers. So, it's not really the end of the world. Qorvo expects gross margins to exceed 46% as it exits fiscal 2017, and to exceed 50% at FY18-end. Within six quarters from the current, the company expects to be at its targeted operating performance. It expects double-digit [above-market] sales growth to continue through fiscal 2018 and to exceed 30% operating margins by the fourth quarter of fiscal 2018.

In a nutshell, we believe that QRVO has the potential for at least 15% upside from current levels in the long term and investors should take advantage of any near-term weakness in the stock.