Qorvo’s RF Chip Business Still Has Long-Term Tailwinds; $128 FVE 

Sector Director

Brian Colello

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Qorvo is a leader in radio frequency chips sold to smartphone makers and infrastructure and defense customers. Although the company is one of the few players with the expertise to supply a wide variety of RF products to leading smartphone makers, we don’t yet believe that it has carved out an economic moat.

Qorvo earns more than 70% of its revenue from mobile products. Given the rise of advanced 5G-enabled smartphones, which use a wider variety of wireless spectrum and frequency bands than in prior generations of networks, RF content per phone has grown exponentially in recent years, lifting Qorvo and its RF competitors. 5G networks are even more complex than 4G, making Qorvo's expertise even more valuable to device makers. These trends should make for a nice runway for further RF growth for Qorvo. Meanwhile, Qorvo is one of the few RF firms with the scale to supply hundreds of millions of RF products per year, giving it a leg up on new entrants. However, Qorvo’s RF prospects might not be rosy forever, given intense competition in RF chips and a customer base of only a handful of tech titans that could put pricing pressure on Qorvo and other RF chipmakers. Qorvo has significant customer concentration with Apple (33% of fiscal 2022 revenue), and it would be a damaging blow to the firm if it were to ever miss out on a future iPhone design cycle.

Qorvo does have nice businesses that supply RF chips into the infrastructure, wireless infrastructure, and military end markets. The company has bright prospects in a couple of areas in 5G infrastructure, including millimeter wave and gallium nitride chipset expertise. Qorvo has products in these areas today, serving defense and military applications, but such technologies will likely be needed within 5G infrastructure in the next decade. Despite the company’s diversification into these other industries, we still see Qorvo’s fortunes as remaining tied to the smartphone space for quite some time.

Business Strategy & Outlook

We believe that Qorvo holds intangible assets around the design, manufacturing, and packaging of a variety of radio frequency products. Areas of strong design expertise, in our opinion, come from bulk acoustic wave filters used in many 4G-enabled smartphones and other products used in the defense and wireless infrastructure industries. However, these assets have not enabled Qorvo or its predecessor companies (RF Micro and TriQuint, which merged into Qorvo in 2014) to generate excess returns on capital for a significant period of time. Thus, we assign Qorvo a no-moat rating until we gain greater confidence that the business can achieve a steady record of excess returns on capital.

Ultimately, RF leaders like Qorvo have years, if not decades, of RF expertise in design and, perhaps more important, in chip manufacturing, packaging, and testing, which we view as especially valuable since most RF products are based on more specialized materials (for example, power amplifiers are based on gallium arsenide), rather than the traditional silicon used in most digital processors. Although Qorvo has not generated exceptional returns on capital to date, we think this expertise will be difficult for others to replicate.

As wireless networks upgrade to 5G technologies, RF designs should only grow in complexity, making RF leaders even more valuable suppliers into smartphones and other device makers than they are today. We believe this complexity in 5G devices enables firms like Qorvo, with a broad product portfolio, to benefit.

Meanwhile, we think that Qorvo has some stickier design wins in a host of nonsmartphone applications. The company is a leading RF supplier into a wider array of other industries, such as wireless base stations and infrastructure and defense applications. In these industries, Qorvo appears to be profiting from longer product life cycles and steadier pricing due to fewer volume discounts. 

A constant concern in the RF industry is the threat of pricing pressure, as Qorvo and others rely on a handful of smartphone leaders for the bulk of their revenue. Similarly, product lifecycles in the smartphone industry are exceptionally short, so hard-fought design wins one year might not translate to a steady revenue stream in the long term. These dynamics prevent us from assigning a wide economic moat rating to Qorvo or other RF players.

To that end, we are modestly concerned about the firm's customer concentration with Apple, which made up 33% of Qorvo's revenue in fiscal 2022. However, Qorvo's supplier relationship with Apple appears secure to us. We doubt that Apple or others would run the risk of poor connectivity within their smartphones just to save a few pennies on a lesser filter, or by taking a chance on a startup without the size and scale to manufacture and supply hundreds of millions of filters for its marquee device launch. Reports suggest that Apple is hiring RF engineers, but we suspect that this expertise is aiding Apple in its well-known development of baseband chips, rather than the creation of RF content that will directly displace Qorvo.

Ultimately, we view Qorvo as one of only a few firms in a shrinking, consolidating industry that can supply the necessary volume of increasingly valuable RF parts to smartphone makers. However, we do not yet have enough confidence in the company’s ability to earn excess returns on capital over the next decade, which we would need before assigning a narrow economic moat to the firm. Qorvo may get there someday by streamlining its cost structure and building even more advanced RF parts that are valued by smartphone makers and infrastructure and defense companies alike.

None

Economic Moat

Qorvo

Qorvo, Inc. engages in the provision of development and commercialization of technologies and products for wireless and wired connectivity. It operates through the following reportable segments: Mobile Products and Infrastructure & Defense Products. The Mobile Products segment is involved in supplying cellular, UWB, and Wi-Fi solutions for applications, including smartphones, wearables, laptops, tablets, and Internet of things. The Infrastructure & Defense Products segment is involved in supplying RF, system-on-a-chip and power management solutions for applications in wireless infrastructure, defense, Wi-Fi, smart home, automotive, and Internet of things. The firm's products include amplifiers, control products, discrete transistors, filters & duplexers, frequency converters & sources, integrated products, optical components, passives, power management products, switches, and wireless connectivity products. The company was founded on December 13, 2013, and is headquartered in Greensboro, NC.

Earnings data Q2 2023

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Qorvo, Inc. provides semiconductor solutions for RF and power. The firm combines product and technology leadership, systems-level expertise, and global manufacturing scale to quickly solve its customers’ most complex technical challenges. Qorvo serves diverse high-growth segments of large global markets, including consumer electronics, smart home/IoT, automotive, EVs, battery-powered appliances, network infrastructure, healthcare, and aerospace/defense. It operates through the following segments: High Performance Analog (HPA), Connectivity and Sensors Group (CSG), and Advanced Cellular Group (ACG). The HPA segment supplies RF and power management solutions for infrastructure, defense and aerospace, automotive power, and other markets. The CSG segment supplies connectivity and sensor components and systems featuring multiple technologies such as UWB, Matter, Bluetooth Low Energy, Zigbee, Thread, Wi-Fi, cellular IoT and MEMS-/BAW-based sensors. The ACG segment supplies cellular RF solutions for smartphones, wearables, laptops, tablets, and various other devices. The company was formed following the merger of RF Micro Devices, founded in 1991, and TriQuint Semiconductor, incorporated in 1981. It is headquartered in Greensboro, NC.

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