Let the Dust Settle for This Chip Stock
This is not an uncertainty at the end of the tunnel turning out to be a train-like situation with chip company Qorvo, Inc. (QRVO).
Hardly so.
The 17% sequential decline QRVO is guiding for their mobile business in December isn’t something investors will dance in the streets about.
The chip sector is an anomaly because of the boom-bust nature of the semiconductor cycle.
Here at the Mad Hedge Technology Letter, we find it more conducive to trade in annuity-like software revenue where CFOs have a better handle on predicted cash flow and state of the balance sheet.
Qorvo, Inc. (QRVO) decreased its December revenue forecast by about $150 million, and about $135 million of that was in mobile chips.
The balance of the decrease was also in Infrastructure and Defense Products (IDP).
Of the $135 million roughly in mobile, QRVO has been wrought by supply constraints, specifically meaning their suppliers not delivering supply for them.
Sucks, right?
The result is QRVOs customers not receiving their allotment of chipsets, thus not able to build their product and use QRVOs products, a type of vicious cycle of being empty pocketed for everyone.
The earnings’ quarter for Qorvo epitomizes the 2021 economy and that’s not only for semiconductor chips — the master word being supply constraints.
The demand part of the equation has also been affected particularly in parts of Asia but is secondary to the supply headwinds.
I am disappointed with the December guide, but it’s not the death of QRVO as I see it.
They need to reinforce a commitment to keep the product channel healthy and give a guide that most accurately describes the supply/demand fronts.
It’s never just cut and dry, but admittedly, visibility is cloudy now and that must be reflected in the management rhetoric and prognosis.
Generally speaking, Qorvo has a great business with best-of-breed products, and we shouldn’t lose sight of that.
Regarding the supply environment, it’s been tough sledding for 1.5 years, almost two years now so it’s not just a 1-day hangover.
The supply environment deteriorated, but inventories are still healthy.
Trying to sort out the internal calculus, I have full faith in QRVO to get their shop in order and meaningfully cast a better light in the March quarter.
I feel that is right around the corner.
The silver lining is that QRVO’s gross margin outlook is intact around 52%.
Opex is in control, and they’re investing in the future of the business.
These investments entail both the traditional parts of the business and newer parts of the business.
And in the end, EPS continuity is hardly affected so we can still count on the same type of elevated profitability which is a hallmark of a good company.
Most chip companies aren’t like crappy loss-making Uber and firms of that ilk.
Absorbing a bit of a correction is nothing to freak out about, but I would say it's the right thing for them to do and will curry investment trust over the long haul.
I can confidently say that I feel great about QRVO’s strategic position as we creep closer to 2022.
They wield premium technology and products, serving attractive end markets growing double-digits, and I fully expect them to outperform next year.
Operations are like a well-oiled machine with sustained margins over 52%, expanding operating margins, and the underlying strength of the company is nothing to diminish.
Considering the concrete evidence, this will be a great semiconductor firm to buy on the dip once the stock settles down from its cringeworthy sell-off.
Granted, the 22% drop from its peak is precipitous, but these smaller chip companies have heightened embedded volatility because of their diminutive size.
That’s not to say they are bad.
The stock has still more than doubled since early 2020 and once the stock levels off, there will be a massive tranche of buyers bidding this chip company back up which should see the stock blast past $200 and beyond.
This could happen by the back half of 2022 and by that time you’ll be glad you bought at discount levels.
