Like many other corporations that saw their share price shoot up in 2020 and 2021, Qorvo Inc. (QRVO, Financial) has experienced falling prices for roughly 16 months.
Despite the share price, the company continues to grow quickly and turn out strong fundamentals.
Among the shareholders who continue to stick with the company is Seth Klarman (Trades, Portfolio) of The Baupost Group.
Based in Greensboro, North Carolina, Qorvo is in the connectivity business and calls itself, in its 10-K for 2021, “a global leader in the development and commercialization of technologies and products for wireless, wired and power markets.”
It operates through two reporting segments:
- Mobile Products: It supplies cellular, Wi-Fi and other wireless solutions. These are used in smartphones, wearables, laptops, tablets and internet of things.
- Infrastructure and Defense Products: Supplies radio frequency, system-on-a-chip and power management solutions. End markets include cellular and IT infrastructure, automotive, renewable energy, defense and IoT.
The annual filing explains that Mobile Products supplies radio frequency solutions to global consumer product companies. The Infrastructure and Defense Products segment offers a more diverse portfolio of products, with generally longer life cycles, to a broader base of customers and end markets.
It operates primary wafer fabrication plants in North Carolina, Texas and Oregon. Its main assembly and test facilities are in China, Costa Rica, Germany and Texas. It also sources products and materials from third-party suppliers.
Qorvo was formed in a 2015 merger between RF Micro Devices and TriQuint. In turn, those companies have roots that go back to Tektronix, Texas Instruments (TXN, Financial), Raytheon and Watkins-Johnson.
The industry is highly competitive and driven by quick advances in technology and other product consideration.
Named competitors for Mobile Products include Broadcom Inc. (AVGO, Financial), Murata Manufacturing Co. Ltd. (TSE:6981, Financial), NXP Semiconductors N.V. (NXPI, Financial), Qualcomm Technologies Inc. (QCOM, Financial) and Skyworks Solutions Inc. (SWKS, Financial).
For Infrastructure and Defense Products, competitors are Analog Devices Inc. (ADI, Financial), Broadcom, Infineon Technologies AG (XTER:IFX, Financial), MACOM Technology Solutions Inc. (MTSI, Financial), Murata Manufacturing, Nordic Semiconductor (NRSDY, Financial) and NXP Semiconductors.
According to the company, its competitiveness depends on its ability to improve its products more quickly than its competitors. In addition, competitiveness is affected by customer service, technical support and its ability to design customized products.
Qorvo argued in the 10-K that its competitive advantages include some 2,200 patents, as well as trademarks and non-disclosure agreements.
Until recently, it had been a powerful performer, staying ahead of the S&P 500 as well as its industry benchmarks:
And as the annualized returns show, its performance has taken a swan dive over the past year:
- One year: -45.25%
- Three years: 13.87%
- Five years: 9%
No 10-year return is available because the company was formed in 2015.
Qorvo carries some debt, so it does not get top marks for financial strength. Nevertheless, it has a reasonable interest coverage ratio.
Its Piotroski F-Score and Altman Z-Score could be higher, but there is no sign of potential cash problems ahead.
That is reinforced by the company’s ability to turn its invested capital into value for shareholders. Return on invested capital is 15.09% versus the weighted average cost of capital at 10.30%.
Again, profitability received a good but not great score. The light green bars tell us Qorvo’s profitability metrics are solid and better than average for the semiconductor industry.
The yellow bar next to the years of profitability is misleading: the company has had only six reporting years (2015 through 2021) and it was profitable in each of them. It should receive a dark green bar.
Qorvo receives a high score for growth thanks to its outstanding earnings per share and free cash flow history. And it is striking when we observe it has grown its revenue by an average of just 19.70% per year over the last three years, while its earnings per share without non-recurring items grew an average of 106.60% per year:
Growth of free cash flow has increased as well, by an average of 17.40% per year over the past three years.
Where is this growth coming from? Qorvo uses organic growth as well as acquisitions. In the past year, it has made two acquisitions: United Silicon Carbide Inc. (silicon carbide power products) and NextInput Inc. (microelectromechanical system-based sensing products).
Dividends and share buybacks
Qorvo does not pay a dividend, but has repurchased shares over the past three years to enhance customer returns:
The company gets a high value ranking, mainly because the GF Value Line has determined it is significantly undervalued based on historical ratios, past financial performance and analysts' projections of future earnings.
The price-earnings ratio is somewhat better than the industry median, 14.47 versus 17.79 for the industry.
That modest price-earnings ratio, combined with a robust Ebitda growth rate, gives the company a PEG ratio of 0.75. That means it is modestly undervalued.
Because the company does not have a predictability rating, we do not have confidence in a valuation based on the discounted cash flow calculator.
Nine of the investing gurus have positions in Qorvo; the biggest three as of the end of the first quarter are:
- Klarman's Baupost Group, which added 11.77% during the quarter to finish with 6,645,712 shares. That represented 13% of the company’s outstanding shares and 8.89% of the firm’s assets under management.
- Ken Fisher (Trades, Portfolio) of Fisher Asset Management reduced his holding by 1.02% to finish the quarter with 688,216 shares.
- Steven Cohen (Trades, Portfolio) of Point72 Asset Management cut his position by 17.79% and ended up with 590,368 shares.
As Ben Alaimo pointed out in a GuruFocus article last month, Qorvo is Klarman’s second-largest holding, behind Liberty Global PLC (LBTYK, Financial), which represents 10.56% of his equity portfolio.
Institutional investors are major Qorvo shareholders, owning 83.69% of the company’s shares.
Insiders own 0.72% of the company, led by President and CEO Robert A. Bruggeworth, who owned 156,239 shares on May 17.
Klarman owns nearly 9% of Qorvo, making him a high-conviction investor. And that seems reasonable, given how quickly and profitably the company has grown.
More importantly, it is growing its bottom line even more quickly than its top line. That should lead to significant capital gains in the coming years.
As this discussion suggests, Qorvo may be suitable for some growth investors. Despite the undervaluation, it carries too much debt for most value investors. And there is nothing here, no dividend, for income investors.