Continuous access to information is evolving rapidly primarily through wireless networks allowing users to link together a myriad of devices. Just about any type of device is a part of this revolution labeled Internet of Things [IoT]. The changes in the type of data, transforming from simple to size intensive video streams, adds significantly to the burden. A slide from Qorvo (QRVO) most recent Investor’s Day illustrates how broad the adoption is becoming.
Companies such as Qorvo, Skyworks Solutions (SWKS), and Broadcom (AVGO) produce a variety of interfacing products for translating or producing high frequency information bearing (digital) waves. The products include: filters (SAW, BAW, TC-SAW), power amplifiers, switches, and tuners. These are not trivial devices, rather very complex, exacting, and somewhat expensive to produce. Because so many of the devices are used in small battery-powered handheld devices: phones, watches, glasses, body sensors, size and power consumption are critical.
Filters act to remove noise plus isolate particular signals (wavelengths) from the radio frequency (RF) wave at the receiving end of the wireless connection. The several types of filters include: Surface Acoustic Wave (SAW), Temperature compensated SAW (TC-SAW), and Broad Acoustic Wave (BAW). SAW filters generally are cheaper and easier to make, but are limited to lower frequency waves less than 3 GHz. SAW converts electrical inputs to an acoustic wave through a piezoelectric substrate.
BAWs are more complex and expensive but will handle much higher frequencies plus include a characteristic of high quality making BAW very good at band selectivity. The selectivity enables highly actuate properties for rejecting signals close in frequency. As the airways become jammed with more and more frequencies, this last characteristic will become more important.
Power amplifiers (PA) amplify signals for transmission through antennas. PAs are often made using GaN, or GaAs, or Silicon. Switches and tuners are used to direct and tune digital signals.
The market place for RF components is exploding. Data usage for cell phones is expected to increase by 7 times between 2016 and 2021. The new 5G network is expected to grow by 70% CAGR between 2019 and 2025. Transition to GaN products is expected to grow by 25% CAGR between now and 2021. GaN products will lower costs significantly for the new faster networks expected with 5G and other applications. The number of IoT devices is expected to explode during the same 5 years by adding wireless connections consisting of both hardware and software. The RF market will grow at 20% or more rates for the next several years.
Qorvo began in January of 2015 being formed by the merger of TriQuint Semiconductor and RF Micro Devices. The two companies brought expertise in the RF field into the merger. TriQuint produced standard and custom products using GaAs, SAW, and BAW technologies. Apple (NASDAQ:AAPL) had been a major customer of the company. TriQuint also owned fabrication shops to produce its own chips. RF Micro Devices brought CMOS PAs, GaAs for mobile phones, and GaN for military and base station. Both TriQuint and RF were vertically integrated with fabrication facilities making economy of scales extremely important for profitability. For Qorvo, growth will positively transform its gross margins.
The company has competitive or superior products in all major categories discussed as shown in its presentation chart below. A note: competitor A is Skyworks; B is Broadcom.
The company is profitable today and still is expecting significant revenue growth of 10-15% for 3-5 years. During the Investors Day, the company made the following projections for key financial markers shown in the following chart.
Qorvo faces two other major competitors: Broadcom and Skyworks. The above charts included show a simplified version of the competitive landscape. With respect to BAW and other products, Broadcom enjoys a very competitive position with Qorvo.
Skyworks mysteriously has not directly embraced an important and major product, BAW. When referencing this absence early in 2017, Goldman Sachs downgraded Skyworks. When pestered about why it lacked this product, the CEO simply answered, “We’re always weighing our options, but for now we’re good with TC-SAW.” This approach seems familiar to us. Do NOT mess up the financials to add a future product, but rather wait until it is truly in demand. The few times we personally have encountered a CEO or company with this attitude, longer term, it did not turn out well. In our view, BAW products will soon become indispensable. Skyworks risks being left at the station.
The most important factors to consider investing in Qorvo are the several synergies between complete product offerings, margin/operating profit growth from economies of scale and natural market growth. We included a slide from a recent Skyworks’ presentation which shows the operating margin percentage for several key companies. Both Skyworks and Broadcom have reached what in our view appears to be the upper limit for operational margin percentages. It is not likely that either will achieve higher results. Therefore, for those two companies, growth will come mostly from growing natural markets. With Qorvo, the possibility is much higher, up to 50% from economies of scale and 75-100% from market growth. For this reason, the financial potential with Qorvo could be much higher than its primary competitors.
We also find it interesting that Skyworks would include a slide in its presentation claiming its operating margin a plus. We also find it interesting that Skyworks’ claims that not sourcing in-house BAW products are not important but rather are taking the watch and see attitude. Both of these observations suggest that Skyworks might be looking at accomplishment not potential. If so, when investing in this sector, one might consider over-weighting Qorvo.
In our view, this sector will grow; we expect all three companies to participate in the growth. The question we pose is, which mix or company do you choose?
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.