Qorvo vs Skyworks Solutions- Devil’s Advocate

By Ujan Shrestha, Shalin Kothari and Xilong Huang
 

Company Profiles: 

Skyworks Solutions Inc. designs, develops, manufactures and markets semiconductors products, including intellectual property. The company’s analogue semiconductors are connecting people, places and others in a wide range of markets from automotive, broadband, infrastructure, military, medical, smartphone and many more.  They seem to benefit significantly from the 5G upgrade due to the complexity of the system, as they have more challenging RF front-end and analogue component designs. 

Qorvo Inc. is an American semiconductor company that designs, manufactures and supplies radio frequency solutions. It is known for selling products to smartphone companies such as Apple but is also involved with infrastructure and defence industry. Qorvo are looking to reap the benefits from the mass rollout of 5G, and plan to take advantage of both parts of the radio spectrum involved in the technology. They are reloading a variety of radio frequency (RF) 5G infrastructure products. These 5G solutions include digital step attenuators, high frequency amplifiers and phase shifter. 

Both are recognised as technology leaders in the manufacturing of RF chips; they both obtain a significant percentage of their total revenue from the world’s largest smartphone manufacturer.  

Executive Summary: 

  • Skyworks Solution Inc. (SWKS) 

SWKS was trading at $145.16 as of 29/10/2020, and it has not had significant price volatility in the past 3 months.  

The earnings are forecasted to grow 23.3% per year, hence looking like a good investment. 

However, there has been significant insider selling over the past 2 months, this may signal a lack of confidence within the company. 

  • Qorvo Inc. (QRVO) 

QRVO was trading at $129.71 as of 29/10/2020, and similar to SWKS it has not had significant price volatility over the past three months. 

Similar to SWKS, earning are also expected to grow per year. The forecasted growth of 22.17% per year shows that it is a good investment.  

However, again similar to SWKS, there has been significant insider selling over the past 3 months, and it has a high level of debt. This shows that there are some risks attached, especially in a period of uncertainty. 

Industry Analysis: 

The success of 4G paved a way for further advancements in the world of wireless technology. This has allowed a promising 5G industry to be born and we are now witnessing it take its initial steps. The societal impact of 5G is endless, however we focus on its impact on consumers and their usage of it on smartphones. 

Expectations for investment success in the 5G smartphones and devices industry is very high, and investors have recognised the importance of having exposure to this advancement in technology. 5G has been deemed to immensely improve speed, latency, reliability, and power consumption while supporting more device connections. 

Gartner forecasts sales of 221 million 5G mobile phones in 2020 (LightReading, 2020), with it expecting to double to 489 million units in 2021. As the demand for 5G increases, so does the demand for the RF chips; Bank of America analyst Vivek Arya has stated that the demand for RF chips could jump from $12.6 billion in 2019, to $18.5 billion over the next three years. This means that companies like Skyworks and Qorvo are sitting on a huge opportunity to grow their sales. More specifically, the relationship with Apple will be very profitable as the concoction of faster wireless technology incorporated with the innovation and expertise of the smartphone powerhouse is likely to generate considerable demand. Apple possess the potential to dominate the 5G smartphone market and are set to produce 80 million 5G iPhones this year. This number is likely to increase annually as the shift from 4G to 5G devices becomes greater. This will be good news for RF chip manufacturers as their earnings will increase, and as a result it will be beneficial for investors who will see their investments accrue healthy returns. 

In addition to the smartphone market, Skyworks and Qorvo also supply products to infrastructure and defence industries. This will provide a steady stream of revenue for them due to the constant demand for the inclusion of new innovative technology for the improvements in efficiency and quality of infrastructure; this also applies for the defence industry. The opportunity for semiconductor companies like these to grow and generate earnings is endless, as the products they manufacture, and design is available for use in multiple industries. 

Qorvo v Skyworks  31/12/2016  31/12/2017  31/12/2018  31/12/2019  Latest   
Price/Sales  2.285   4.336  2.885  4.667  2.509  3.207  4.484  6.335  4.907  7.929  
Price/Earnings  N/A  15.75   333.0  21.53  132.02  10.72  40.22  25.29  40.66  32.91  
Price/Free Cash Flow  24.13  16.26  28.71  15.54   11.62  13.17  18.62  25.76  21.01  25.43  
Price/Book  1.353   3.896  1.727   4.260   1.632  2.889  3.10   4.830  3.544  5.980  
Earnings Yield %  -1.42   6.35  0.30  4.64  0.76  9.33  2.49  3.95  2.46  3.04  
Enterprise Value ($Bn)  7.155  13.14  8.671  19.23  7.535  14.36  13.93  19.42  16.16  23.87  
Enterprise Value/EBITDA  8.806  9.104  7.404  9.925  9.851  6.688  15.41  15.10  16.44  19.19  

Company Analysis: 
Both firms have exhibited strong growth over recent years, epitomised by the consistent EV growth, made even more impressive given the economic turmoil endured in recent months. Both stocks have demonstrated resilience despite the lack of demand in many industries, and enhancements in 5G technologies suggest there is still huge scope for growth. Growth investors should take special note of the P/E ratio and Earnings Yield, which imply that Skyworks in particular may be a potential bargain. It is fair to say both companies exceeded expectation for the past 12 months. The US semiconductor market recorded returns of 37.7% outperforming the overall US market by over 20%, which reflects the growing importance of semiconductors in manufacturing of electronic devices. Now consider that Qorvo and Skyworks reported returns of 64.5% and 59.5% (Simply Wall St., 2020) respectively, and it’s clear to see why many investors have been studying potential opportunities for these 2 impressive companies. 

If investors were left to choose between the 2, which would it be? There is certainly merit in both companies, and it is seemingly difficult to see how one can lose with either of these options. Both are considered relatively undervalued by analysts, and although Qorvo is generally considered to have weaker fundamentals than Skyworks, it has also outperformed its competitor. Qorvo and Skyworks derive a large proportion of their revenue from Apple’s performance (32% and 51% respectively), which could play a major role in distinguishing them. With Apple set to become one of the main beneficiaries of the technological transition to 5G, the recent announcements of their 5G enabled devices will require an increased demand for Radio Frequency (RF) Chips. Skyworks as a result look set to profit from this more than Qorvo although this increased dependence on Apple should also make investors wary.  

Skyworks’ revenue growth has in general slowed down in recent years, which may be attributed to the lack of demand from one of its main buyers Huawei, which made up 10% of sales during 2017, due to increases in US regulation. Qorvo has historically proved to be stronger in terms of revenue and growth which may sway momentum investors. Skyworks has a growing relationship with Apple and has thus developed a growing dependence on the company, which is something to consider, should Apple not quite meet targets. Qorvo is far less susceptible to a shock here and is arguably a safer option with great potential. 

Revenue Growth Y-on-Y 2016 2017 2018 2019 
Skyworks Solutions 1% 11% 6% (13%) 
Qorvo 52.3% 16.16% -1.95% 3.90% 

The demand for both firms’ products extends far beyond the market for mobiles. For example, Qorvo has adopted gallium nitride (GaN) technology to improve 5G infrastructure, and the demand for GaN chips could potentially rise 24% annually through to 2024 (Chauhan, 2019). Skyworks also plans to utilise small cell solutions to maximise efficiency with the implantation of 5G. These small cells will boost capacity for telecom providers globally. These technologies exemplify how both firms stand to benefit greatly during the roll-out of 5G. 

A potential concern for investors when viewing both of these relatively “low-risk” companies is the volume of what is known as “Insider Transactions” (Simply Wall St., 2020). Insider trading is sometimes frowned upon by investors and can cause uncertainty among potential buyers. This refers to when leaders within the company (i.e. directors or board members) decide to buy or sell stock internally. Large buy orders typically indicate the confidence of board members in terms of future performance of the company although this may not necessarily be the case. In the cases of Qorvo and Skyworks, we have seen large sales of stock in the last 3 months, in particular for Skyworks. 4 Skyworks directors sold 33,577 shares valuing at almost $5m, which may suggest a lack of confidence during the current pandemic, however we cannot be certain of the owners’ intentions. Qorvo, whilst similarly experiencing insider sales to a lesser degree, saw owners sell $314k worth of stock in the last 3 months. This perspective could imply that the owners of Qorvo are extremely confident about future returns. Whilst investors should never solely rely on this metric, this is something to bear in mind for those deciding between the 2 manufacturers. 

Competitor Analysis: 

Company Name Skyworks Solution Qorvo Cirrus Logic Analog Devices Broadcom 
Market capitalization($bn) 24.2 15.0 4.0 44.8 146.9 
Revenue ($bn) 3.377 3.090 1.190 5.991 22.597 
Revenue growth (YoY) % -12.7 3.90 9.93 -3.75 8.39 
Gross Margin % 47.5 35.7 53.0 67.0 55.2 
Price/Earnings 32.91 40.66 22.98 39.89 64.98 
Price/Book 5.98 3.54 3.13 3.77 6.23 
Debt/Equity 0.431 0.497 1.864 

Although this report focuses on Qorvo and Skyworks Solutions, it is also very important to consider how competitor firms in the US market and the whole industry are performing.  Other major competitors in the semiconductor industry include Cirrus Logic, Analog Devices and Broadcom. To put the valuation metrics into context: The industry average P/E ratio is 38.87x whilst the industry average P/B ratio is 3.3x, (Simply Wall St., 2020). 

Analog Devices are one of the major players in the industry, producing a wide range of products—including data converters, amplifiers and linear products, radio frequency (RF) integrated circuits and power management products. Their gross margin of 67% allows them to reinvest their revenues into R&D. In the past three years, R&D expenses have been over 18.5% of their revenues, (Analog Devices, 2020). However, Analog’s P/E and P/B ratio suggest that the firm is currently overvalued in comparison to the industry averages. This may also be highlighted by the high levels of insider selling over the past 3 months. 

Broadcom is another large competitor within the market, specialising in broadband modems and wireless technologies within smartphones. One of their main customers again is Apple, comprising of 20% of their net revenue in 2019. At the start of 2020, Broadcom signed a deal with Apple to sell $15 billion worth of iPhone parts, (Leswing, 2020). Broadcom can be considered one of the stronger competitors in the industry, backed by their recent high revenue growth. However, their P/E and P/B ratios both suggest that they are heavily overvalued in comparison to the industry averages and both Qorvo and Skyworks Solutions. Furthermore, their debt levels are considered high and interest payments are not well covered. 

Cirrus Logic is considered to be a smaller competitor by market capitalisation and revenues. Currently Cirrus Logic is a good value based on its P/E ratio of 22.98x compared to the industry average of 38.87x. Their P/B ratio of 3.13x compared to the industry average of 3.3x further highlights that the good share price value currently. The firm does have a lower gross margin compared to its competitors, but since Cirrus are small, they may not have achieved the economies of scale competitors have already reached. Like both Qorvo and Skyworks Solutions, one of the company’s key customers is Apple, accounting for 79% of Cirrus’ total sales in fiscal year 2020, (Bylund, 2020). The company has been providing audio solutions for Apple products for over a decade. However, if demand for Apple products fall, the performance of the company will naturally be impacted significantly. Similar to Skyworks, Cirrus are debt free and so are in a financially healthy position. 

ESG: 

Both companies prove to be relatively poor in terms of implementing ESG guidelines into their operations, with both graded as HIGH risk. Qorvo qualifies in the 76th percentile as of October 2020. Qorvo’s Environmental Responsibility program proves to be limited in terms of its impact especially, scoring almost 20, which alone puts it in the middling category. However, Qorvo’s long term vision encompasses the preservation of natural resources, which could be improved drastically in the future, given the improving efficiency of output both in the industry and world as a whole. The Corporate Social Responsibility program (Qorvo, 2020) ensures accountability which is a step in the right direction for future change, although there is still plenty to be done if they wish to improve ethical standards in the firm.  

Skyworks Solutions fares marginally better than Qorvo in terms of environmental impact (63rd percentile), although again, considerations of social and governance risks are not necessarily at the forefront of operations. Skyworks acts as a member of the Responsible Business Alliance (RBA) which ensures integrity and responsibility environmentally. The impact of this group is limited in that the industry requires capital-intensive production, however the regulation ensures that they are not wasteful in production. And given the scale of operations, this impact is considerable. The social impact of this organisation is often understated as supply chains for electronic companies leave global footprints which affect many local communities. This effort is a “continuous improvement in the social, environmental and ethical responsibility”, (Skyworks, 2020).  

Regular audits from external bodies ensure that these firms are always looking to enforce ESG guidelines where possible, and this transition has improved transparency and ethical integrity within the industry. We can expect to see these scores decrease over time, however as of now, there is still plenty of room to improve. 

References 

Analog Devices, 2020. 2019 Annual Report. [Online]  
Available at: https://investor.analog.com/static-files/69246bf2-5e3e-40b2-8064-f90a4e0efccf 
[Accessed 31 October 2020]. 

Bylund, A., 2020. 3 Semiconductor Stocks to Buy if the Market Crashes. [Online]  
Available at: https://www.fool.com/investing/2020/09/20/3-semiconductor-stocks-to-buy-if-the-market-crashe/ 
[Accessed 31 October 2020]. 

Chauhan, H., 2019. Skyworks Solutions vs. Qorvo: Which Is the Better 5G Stock?. [Online]  
Available at: https://www.fool.com/investing/2019/12/21/skyworks-solutions-vs-qorvo-which-is-the-better-5g.aspx 
[Accessed 28 October 2020]. 

Leswing, K., 2020. Broadcom strikes $15 billion deal with Apple to sell it iPhone parts. [Online]  
Available at: https://www.cnbc.com/2020/01/23/broadcom-will-sell-apple-wireless-parts-for-three-years-as-5g-launches.html 
[Accessed October 31 2020]. 

LightReading, 2020. Gartner predicts 221M 5G phones sold in 2020, 12% of all phones. [Online]  
Available at: https://www.lightreading.com/5g/gartner-predicts-221m-5g-phones-sold-in-2020-12–of-all-phones/d/d-id/757126 
[Accessed 30 October 2020]. 

Qorvo, 2020. Our Program. [Online]  
Available at: https://www.qorvo.com/about-us/corporate-social-responsibility/our-program 
[Accessed 28 October 2020]. 

Simply Wall St., 2020. American Semiconductors Stocks. [Online]  
Available at: https://simplywall.st/stocks/us/semiconductors 
[Accessed 31 October 2020]. 

Simply Wall St., 2020. Compare. [Online]  
Available at: https://simplywall.st/compare/NasdaqGS%3ASWKS%2CNasdaqGS%3AQRVO 
[Accessed 28 October 2020]. 

Simply Wall St., 2020. Read This Before Buying Qorvo, Inc. (NASDAQ:QRVO) Shares. [Online]  
Available at: https://simplywall.st/news/read-this-before-buying-qorvo-inc-nasdaqqrvo-shares/ 
[Accessed 28 October 2020]. 

Skyworks, 2020. Sustainability. [Online]  
Available at: https://www.skyworksinc.com/Sustainability 
[Accessed 28 October 2020]. 

Industry Jargon: 

• Price/Sales Ratio: The price-to-sales (P/S) ratio is a valuation ratio that compares a company’s stock price to its revenues. It is an indicator of the value placed on each dollar of a company’s sales or revenues. 

• Enterprise Value/EBITDA (EV/EBITDA): Enterprise multiple, also known as the EV multiple, is a ratio used to determine the value of a company. The enterprise multiple looks at a firm in the way that a potential acquirer would by considering the company’s debt. tocks with an enterprise multiple of less than 7.5x based on the last 12 months (LTM) is generally considered a good value. 

• Enterprise Value: Enterprise value (EV) is a measure of a company’s total value, often used as a more comprehensive alternative to equity market capitalization. EV includes in its calculation the market capitalization of a company but also short-term and long-term debt as well as any cash on the company’s balance sheet. Enterprise value is a popular metric used to value a company for a potential takeover. 

• Price/Earnings ratio: The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS). P/E ratios are used by investors and analysts to determine the relative value of a company’s shares in an apples-to-apples comparison. It can also be used to compare a company against its own historical record or to compare aggregate markets against one another or over time.  

• Price/FCF ratio: Price to free cash flow is an equity valuation metric that indicates a company’s ability to generate additional revenues. It is calculated by dividing its market capitalization by free cash flow values. 

• Price/Book: Companies use the price-to-book ratio (P/B ratio) to compare a firm’s market capitalization to its book value. It’s calculated by dividing the company’s stock price per share by its book value per share (BVPS). An asset’s book value is equal to its carrying value on the balance sheet, and companies calculate it netting the asset against its accumulated depreciation. 

• Earnings Yield: The earnings yield refers to the earnings per share for the most recent 12-month period divided by the current market price per share. The earnings yield (which is the inverse of the P/E ratio) shows the percentage of a company’s earnings per share. This metric is used by many investment managers to determine optimal asset allocations and is used by investors to determine which assets seem underpriced or overpriced. 


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