• Thu. Sep 24th, 2020

Dimancherouge

Technology

Qorvo Surges On Future Expectations, But Don’t Buy Yet (NASDAQ:QRVO)

In a teleconference, management at Qorvo (NASDAQ: QRVO) raised its future guidance for the next quarter after robust earnings and increased demand. The company saw strong demand for its mobile services and they expect their earnings to increase from $1.90 to $2.14 per share in the next quarter. On the news, the stock jumped 8%. While the future looks robust going forward, I am cautious that this is an immediate buying opportunity. It is my belief that the company will perform well moving forward. However, in the short-term, with the political uncertainty of the election weighing on the markets, I see the broader market selling off. And, just as the broader market rallied on news of Qorvo’s bullish outlook, Qorvo will likely sell further in the near-term on the selling in the NASDAQ. After the election, when the markets have more certainty with knowing what kind of administration they are dealing with that is when I believe that Qorvo will be a buy:

Operating Expenditures

In their teleconference, The company acknowledge that in order to gain its expected per share increase, cap-ex would be moving higher. However, the company also suggested that they would be able to contain these expenses and that they were necessary to achieve their target of increased per share earnings:

You won’t be able to get to the $2.14 EPS without this increase. We are looking at higher OpEx in the quarter. We guided to $2.07, we’re looking around $2.14. That’s combination of labor costs and product development spend and so forth.

At the same time the company gave guidance of increased earnings towards $900 – $940 million for the upcoming quarter, representing about a 17% increase. The company really emphasized the increased demand in mobile which will drive this growth.

The broader semiconductor sector

A look at the broader industry and where it is with regards to the 5G rollout shows that the industry is at about 1% completed; 99% to go. If the projections are to be consistent then the semiconductor industry, along with Qorvo, will see continued growth in the future. Given this, the potential for other companies to see in-kind growth increases boosted these stocks on the same news.

SkyWorks Solutions (NASDAQ: SWKS):

SkyWorks Solutions

Marvell Technology Group (NASDAQ: MRVL):

MRVL Daily Chart

Broadcom Inc. (NASDAQ: AVGO):

AVGO Daily Chart

Headwinds

No discussion of stocks is complete in today’s landscape without a nod towards the global pandemic. There has been a push towards safer-at-home working environment and demand for home services – often lower in quality than workplace demands, is up 75% as more and more individuals work, and students study, from home.

But, I caution anyone from thinking that simply because there is greater demand from individuals at home on the system that does not necessarily translate into a rush for Qorvo. As I mentioned, CEO Bob Bruggeworth stated that mobile demand was higher. That is good news for the company while it rolls out its 5G hardware to handle that demand. But, in the company’s teleconference call they did not specifically state that they were pushing to roll out their 5G offerings faster based upon the pandemic and its consequential demand.

Still, however, the increased business in mobile was very positive and the company believes the payout is finally here; this is where the future guidance is going forward.

And, to reiterate, I am cautious moving forward with the potential of a tight political race in the very near future; there is a decent amount of uncertainty that is weighing on the markets.

NASDAQ and the recent selling

In a three-day sell-off (from Thursday, 3, September – Tuesday 7, September), the NASDAQ Index broke its record for fastest 10% correction in history. Investors have a lot on their minds right now with the pending election and the effects of the pandemic. Given the quick selling that transpired, it may have been that the market seized on any news as good news and took a breather from its selling as investors bought the dip. On Wednesday, the semiconductor industry, the broader tech industry and by extension the NASDAQ rallied as well:

NASDAQ Daily Chart

Investors are uncertain about the outcome of the election in two months. From that uncertainty, I expect continued pressure on the topside over these next few weeks. Markets do not like uncertainty. However, once the election is over and the market then knows what kind of administration will be guiding the economy moving forward, then I believe that removing the uncertainty will bring in more buying. Until then, selling may ensue from time-to-time.

Apple and its future sales

I wanted to bring in Apple (NASDAQ: APPL) into this conversation to give some backstory. Qorvo’s big push right now is the 5G rollout. Given that, Apple is said to be issuing lower guidance for its iPhone 12 expected demand; the company expects to sell about 63 – 68 million handsets of their new iPhone 12. That is about 5 million less than the iPhone 11. The read: Demand for 5G may not be as large as thought.

Nonetheless, Qorvo will still move forward with its rollout and so the future sales still exist. At the same time, there is a great deal of uncertainty as to whether or not COVID will push any of these companies that provide 5G and its infrastructure to roll out anything faster. However, Qorvo, in its teleconference did not make reference to any hastening of its rollout.

My expectation is that future demand for 5G technology coming from the demand side of both handset owners and the pandemic will not push the hand of Qorvo to move quicker with this. So, while there is the landscape of the pandemic moving individuals to work and study at home, and despite the 75% increase in mobile usage, it does not look as if there will be a push faster to roll out more 5G tech any sooner. This should keep the guidance that the company has issued in step.

Conclusion

There are fundamentally two variables at play here. First, there was good news from Qorvo in their latest quarterly earnings and the raised guidance going forward. The second major factor is that the semiconductor sector, the broader tech sector and the NASDAQ Index all rallied on very welcome news. But, I just don’t see the long term effects of this news lifting the the market overall with so many factors currently weighing on the stock market.

Investors are focused on the upcoming elections and the outcome and ensuing effect on the economy from that. My expectation for the broader market is that the lift the stock market received from better-than-expected future guidance will be short lived and the tech sector will sell off again in the coming days and weeks. Qorvo will follow suit. Then, once the election is out of the way, looking at the robust demand and increased profits from Qorvo will be a better time to execute a buy on the stock.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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