Qorvo is a Sell After the Recent Upsurge

My recent long call on Qorvo (QRVO) has yielded double-digit returns in just a few days. The chip maker has had a torrid time in 2015 as the stock has been beaten down for cutting guidance due to concerns in China. I believed the stock was too undervalued going into earnings as all the bad news had already been baked in the shares. Henceforth, I was bullish on Qorvo going into earnings and the stock has jumped more than 20% since my recommendation.

The chip maker recently launched a $1 billion buyback spanning over 12 months.
The company will be purchasing roughly 13% of its shares at present levels and has already paid over $600 million in buybacks in the last few months.

Although buybacks indicate that the company has confidence in its undervaluation, I think Qorvo is overspending on them. The semiconductor industry is in dire need of widespread consolidation, which is why I think the buyback money could have been put to better use. The recent merger of Broadcom and Avago, along with the acquisition of PMC Sierra by Skyworks show the entire industry is looking for consolidation.

I am not a big fan of buybacks as they do not result in new revenue streams. Mergers and acquisitions on the other hand can open up many opportunities and can result in tremendous cost-savings due to synergies.

I was extremely bullish when TriQuint and RF Micro merged into Qorvo. But I think the companies should have been extensively looking for more acquisition candidates instead of spending over $1.5 billion on share repurchases. There have been many M&A in the semiconductor industry over the last 18 months and Qorvo should have respected that trend by looking for more M&A opportunities.

Despite the fact that Qorvo’s shares look undervalued, I think the stock price may stagnate or move downward in the near future due to unavailability of growth opportunities. While peers like Skyworks and Avago continue to expand their horizons, Qorvo will struggle as it doesn’t have a highly diversified revenue stream.

Conclusion


I am disappointed in Qorvo’s management decision to pay billions in buybacks instead of focusing on growth opportunities. The entire semiconductor industry is looking for consolidation prospects and I believe Qorvo should have done the same. The stock may appear undervalued but I think the company’s growth will stagnate due to lack of growth opportunities. Thus, I think it’d be wise for investors to cash in on the recent upsurge and sell the stock.
Published on Nov 12, 2015
By Akshansh Gandhi

Copyrighted 2016. Content published with author's permission.

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