RF Micro Devices (RFMD, Financial) has been a great performer for investors in 2014. The company has consistently hammered the analysts’ estimates on top line as well as bottom line, and this has resulted in a massive upsurge in its valuation. However, given the spectacular 100%+ YTD appreciation, should investors continue holding the stock? Let’s find out.
The risks
RF Micro Devices has had an inconsistent past. The company has been unable to support either revenue development or profitability in the previous decade. This conflict is regardless of the fast development of cell phone shipments over recent years, and it brings into inquiry the contention that development of the cell phone business will prompt development for RF Micro.
In FY 2011, which finished in March of that year, RF Micro oversaw $1.05 billion of revenue. Revenue was lower in FY 2012 and 2013, at long last climbing over that crest esteem in financial 2014. In the interim, worldwide cell phone shipments rose from around 300 million in 2010 to in excess of 1 billion in 2013.
Moreover, the rising competition from Skyworks Solutions (SWKS, Financial) can also hurt RFMD. Skyworks has been expanding its foot print in the Internet of Things market. The IoT is a huge opportunity for every chipmaker and with so many companies already taking initiatives to make the most of it, RFMD may struggle.
Overdependence on Apple and Samsung
RF Micro Devices derives over 45% of its revenue from Samsung (SSNLF, Financial) and Apple (AAPL, Financial); although this has played well for the company to now, it may struggle if it loses contract from either one of these companies. The merger with TriQuint (TQNT, Financial) will further improve the company’s dollar content in Apple’s products, but overdepending on a single company can be harmful.
Valuation
In the beginning of 2014, RF Micro Devices was attractively priced; however, with the 100%+ rise in its price, the scenario has changed. With a trailing P/E ratio of almost 70 and P/S ratio of over 2.5, RF Micro Devices is no more a value stock and should be sold.
Conclusion
RF Micro Devices is all set to release its earnings today, and I expect it to surpass the estimates yet again. However, I don’t think there’s more upside left and at present valuations, the stock is a sell. Hence, in my opinion, investors should consider selling the stock after the earnings report. Given the risks, RF Micro Devices is a little too expensive to hold.
