The fifth-generation (5G) wireless market is going to be the next big growth driver for stocks that were battered last year due to a slowdown in smartphone demand and overall weakness in the semiconductor industry.
This is why Qorvo (NASDAQ: QRVO) stock has shot up nearly 25% in 2019, even though it was struggling last year thanks to its dependence on Apple for a big chunk of revenue. Qorvo, which makes radio-frequency chips that enable wireless communications between devices, gave investors hope earlier this year when it said that the 5G business is gaining traction.
So when the company releases its fourth-quarter results for fiscal 2019 on May 7, a lot will be riding on what Qorvo has to say about its progress in 5G, given that the mobile business could be a sore point once again.
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Mobile will be Qorvo's Achilles' heel once again
Wall Street expects Qorvo's revenue to remain flat year over year, while its earnings per share will dip slightly to $1.05. The chipmaker gets around 72% of its total revenue from the mobile business, and that's going to weigh on its fourth-quarter results.
Its mobile revenue fell 6% annually for the December-end quarter, with Qorvo blaming "weaker flagship phone volumes and a softer China domestic market." The bad news for Qorvo is that the weakness seems to have continued into 2019, with smartphone sales in China down 6% year over year.
The number of smartphone launches in this critical market fell 35% during March. OEMs (original equipment manufacturers) seem unwilling to launch new devices, because smartphone sales in China were down by double digits for four consecutive months before March.
The gloomy smartphone market has forced Qorvo to restructure its mobile business, with the company closing its Florida facility and putting the Texas facility on idle mode. These actions will hurt Qorvo's gross margin, which will fall to 47% during the fourth quarter from 49.5% in the third quarter. What's more, the company expects its mobile revenue to drop a whopping 25% sequentially.
In all, Qorvo's mobile business will remain in tatters during the fourth quarter.
5G-related businesses will enjoy greater clout
Demand for 5G chips has boosted Qorvo's infrastructure and defense products (IDP) business in recent quarters. The segment's revenue shot up 14% annually in the third quarter, and it was the 11th straight quarter of double-digit growth for this business.
Qorvo credits the double-digit growth of IDP to an uptick in 5G infrastructure investments, because demand for the company's massive MIMO (multiple-input, multiple-output) solutions is increasing. This is to be expected, given that MIMO is a critical component of 5G that allows a network to send and receive several signals using a single radio channel.
Simply said, massive MIMO boosts antenna capacity -- it contains 8 to 12 times more radio-frequency content when compared to a typical base station, according to Qorvo. So the demand for these chips will increase, because we are still in the early phases of 5G deployment.
According to IDC, 5G infrastructure spending will jump from just $528 million in 2018 to $26 billion in 2022.
Qorvo expects its IDP revenue to remain flat sequentially during the fourth quarter, which should translate into a revenue of around $230 million. This means that IDP will supply just over 34% of Qorvo's projected revenue of $670 million for the quarter, indicating that this 5G-driven business will enjoy greater clout.
Surprise mobile growth in the cards?
Investors shouldn't forget that the 5G business could power up Qorvo's mobile growth as well when new handsets hit the market. The company is already engaged in 5G design activity at smartphone OEMs and expects the devices to hit the market sometime next year.
However, the 5G smartphone market could pick up the pace earlier than Qorvo expects. That's because bellwether Qualcomm had said earlier this year that it expects more than 30 5G-enabled smartphones to hit the market in 2019.
If that's indeed the case, Qorvo's mobile business could get back on track soon enough.
In all, don't be surprised to see a bright outlook from Qorvo on the back of 5G-driven catalysts that could positively impact both its infrastructure and mobile businesses, which should be enough to send the stock higher.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool owns shares of Qualcomm and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.
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