Qorvo vs Skyworks Solutions

By Emrah Taylan and Koushik Karthikeyan

Company Overviews

Qorvo Inc. is a US semiconductor company that designs, manufacturers and supplies radio frequency solutions, which is the band of frequencies roughly between 20kHz and 30GHz. It is known for selling its products to smartphone players such as Apple, as well as to the infrastructure and defence space. As the mass rollout of mass 5G occurs, Qorvo plans to take advantage of both parts of the radio spectrum involved in 5G. They are releasing a variety of radio frequency 5G infrastructure products, both for the millimetre band and for the sub-6 GHz band. These 5G solutions include digital step attenuators, high frequency amplifiers, and phase shifters.

Skyworks Solutions Inc. designs, develops, manufactures and markets semiconductor products, including intellectual property. The Company’s analogue semiconductors are connecting people, places, and things, spanning a number of new and unimagined applications within the automotive, broadband, cellular infrastructure, connected home, industrial, medical, military, smartphone, tablet and wearable markets. Like Qorvo, Skyworks supplies to Apple and seems to benefit significantly from 5G upgrades, as 5G systems are more complex, with more challenging RF front-end and analogue component designs.

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

Analysis

Qorvo Inc. is trading at $135 as of market close on the 22nd of October whilst Skyworks Solutions Inc. is trading at $149.73. For both companies, over the past few years there has been a rapid rise in share price, and this will only continue to increase as the 5G network is rolled out across the global market, with an estimated three billion people using the network five years from now. Qorvo has seen its share price shoot up by around 56% in the past 6 months and about 72% over the year. Similarly, to Skyworks who has seen a 61% and 68% increase respectively. Despite both stocks appearing then to be a missed opportunity by many, there is still a very clear path for massive growth in the 5G era and share price is expected to continue to rise to new levels.

In terms of 5G upgrades, both are set to gain from their relationship with Apple. Skyworks gains 51% of its total revenue from Apple, meanwhile Qorvo gains 32% of its total revenue from Apple. So, both gain the opportunity to grow from Apple’s increased demand in Radio Frequency chips as they roll out their 5G enabled devices. Despite this, Apple’s domination of the 5G market could give Skyworks the edge as Apple contributes more to Skyworks’ topline. Apple is set to produce 80 million 5G iPhones this year, according to the Nikkei Asian Review, with total 5G iPhone shipments coming in at 123.5 million next year which provides evidence for Apple’s forthcoming dominance of the 5G phone market.

Fundamentally, Skyworks also seems to be stronger. For example, Skyworks’ net margins are 2.5x that of Qorvo (as of the most recent fiscal year), while its valuation is also more reasonable trading at about 24x earnings, compared to 37x for Qorvo. Moreover, Skyworks remains debt free unlike Qorvo which has $1.5 billion in debt, which is particularly important with the volatile market the coronavirus and US election produces and the current recessionary environment. 

In addition, when looking at the PE ratio, Skyworks is lower in comparison to Qorvo, suggesting again that they are the better stock to invest in. This is because a higher PE ratio means that the stock is more expensive to invest in, as investors are paying more for each unit of earnings. This makes Skyworks cheaper relative to Qorvo. According to the market Skyworks is 21.2% undervalued in comparison to Qorvo who is 3.2% undervalued, so it indicates it’s a better stock to invest in.

However, at the moment Qorvo also seems to be undervalued compared to its competitors in other financial metrics. It has a price to book ratio of 3.54 compared to industry average of 4.12. Qorvo also has a lower EV/EBITDA of 16.44 and EV/Revenue of 4.98 than Skyworks which has values of 19.19 and 7.23 for those respective measures. However, it has a worse profitability than Skyworks due to the fact it has a lower EBITDA margin of 35.25% compared to 43.50%, which could explain why it is undervalued. Furthermore, Qorvo’s 20-day moving average (133.15) is higher than its 50-day moving average (130.22) which indicates upward pressure that would increase its price and make the current low price to book ratio look obsolete, thus meaning it will have more of a fair value.

Recommendation

Buy Skyworks, Long

Although Skyworks’ has a more focused product portfolio than Qorvo, it’s’ more significant partnership with Apple means it is set to gain considerably more from the deal from the introduction and implementation of 5G. Furthermore, with the shift towards 5G smartphones, it is estimated that by 2023 its share as a percentage of the global market is likely to increase from less than 12% to more than 51%, giving a very promising outlook on Skyworks’s share price in the long term, with huge levels of growth expected. Skyworks’ also has better fundamentals than Qorvo, which makes it more robust in the current uncertainty surrounding markets. In addition, Skyworks’ P/E ratio of 32.95 is lower than Qorvo’s P/E ratio of 40.76, suggesting at the moment it is better value for money.

Industry Jargon

EV/EBITDA – The ratio of a company’s enterprise value compared to its EBITDA. A low value means a stock could be undervalued.

EV/Revenue – The ratio of a company’s enterprise value compared to its revenue. A low value means a stock could be undervalued.

Price to Book – The ratio of a company’s current market price compared to its book value. Lower values of this ratio tend to suggest a stock is undervalued.

EBITDA Margin – measure of a company’s operating profit as a percentage of its revenue. It is considered to be a good indicator of a company’s financial health because it evaluates a company’s performance without needing to take into account financial decisions, accounting decisions or various tax environments.

References

Bylund, A., 2020. 3 5G stocks to Buy Right Now. [Online] 

Available at: https://www.fool.com/investing/2020/08/07/3-5g-stocks-to-buy-right-now.aspx 

[Accessed 22 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 21 October 2020].

Chauhan, H., 2020. 2 5G Stocks That Could Set the Market on Fire This Earnings Season. [Online] 

Available at: https://www.fool.com/investing/2020/10/22/2-5g-stocks-that-could-set-the-market-on-fire-this/ 

[Accessed 22 October 2020].

Forbes, 2020. Choose Skyworks Over Qorvo As Apple Transitions To 5G?. [Online] 

Available at: https://www.forbes.com/sites/greatspeculations/2020/06/08/choose-skyworks-over-qorvo-as-apple-transitions-to-5g/#630b76ef3d3b 