Shares of Apple suppliers Qorvo (QRVO) and Skyworks (SWKS) are trading higher today. At the time of writing, QRVO stock gained 3.2% while SWKS stock is up by 2.7%. However, Apple (AAPL) stock is down by 0.4% today.
According to reports from The Fly, both Qorvo and Skyworks have been upgraded by Bank of America/Merrill Lynch. BofA analyst Vivek Arya upgraded the two stocks from “underperform” to “buy.” This double upgrade is what’s driving the two semiconductor stocks higher today.
Arya raised Skyworks’ target price from $92 to $122 while Qorvo’s target price was raised from $80 to $130. The analyst is bullish on the stocks as the transition to 5G tech will be one of the key drivers of sales for these companies.
The smartphone upgrade cycle will result in a robust demand for components such as RF (radio frequency) chips. Arya further claimed that the two stocks have underperformed semiconductor ETFs since 2015 and might be an attractive buy at the current stock price.
Skyworks stock is trading at $104.5 while Qorvo stock is trading at $110.
Qorvo stock has returned 53.5% in 2019
Qorvo designs and produces RF components and solutions. The mobile products business segment accounts for over 70% of company sales. Skyworks designs and produces mixed-signal semiconductor products for consumer electronics, mobile communication systems, and network infrastructures.
The two stocks can easily be some of the top beneficiaries as customers upgrade their smartphones to 5G-enabled devices starting in 2020. We already know that Apple will most likely launch its new lineup of 5G-enabled iPhones in September 2020. Apple is also widely expected to launch a lower-priced iPhone SE 2 smartphone in early 2020.
Similar to most semiconductor stocks, Qorvo and Skyworks have made a strong comeback in calendar 2019. Qorvo stock has returned an impressive 80% year-to-date. It fell around 9% in 2018, driven by the ongoing trade war between the US and China and a slowdown in Apple sales. Qorvo generates over 50% of sales from China. Comparatively, Skyworks stock has gained 54% this year after falling 30% in 2018.
The broader markets bounced back in the first half of 2019 after the sell-off witnessed in the fourth quarter of 2018. However, shortly after Apple released its new lineup of smartphones in September, Qorvo and Skyworks started gaining momentum.
Since September, Qorvo and Skyworks have gained 55% and 40% in market value, respectively. The two stocks were upgraded by Cowen in October after supply chain indicators pointed to strong iPhone sales.
Qorvo’s strong quarterly results
Quarterly results for the two companies boosted the rally. In the second quarter of fiscal 2020 (for the year ending in March), Qorvo reported sales of $807 million and earnings of $1.52. This was considerably higher than consensus revenue estimates of $754 million and sales estimates of $1.3.
Qorvo also raised its forecast for the December quarter. The company forecast sales between $840 million and $860 million with adjusted earnings of $1.67. The consensus sales figure was $758 million while the average earnings forecast was $1.67.
In the fourth quarter of fiscal 2019 (for the year that ended in September), Skyworks reported sales of $827.4 million, above consensus estimates of $825.4 million. Its earnings per share of $1.52 also beat Wall Street estimates of $1.50.
For the December quarter, Skyworks forecast sales between $870 million and $890 million and earnings of $1.65. Wall Street expected Skyworks to post sales of $873.3 million and earnings of $1.61 in the first quarter of fiscal 2020.
Will QRVO and SWKS move higher in calendar 2020?
In the last five years, Skyworks has returned 51%, while Qorvo is up 55% since December 2014. This means that the two stocks have generated most of their five-year returns in 2019. Comparatively, semiconductor ETFs such as SOXX and SMH have returned 156% and 148%, respectively, in the last five years.
We’ll see if the companies can continue their stellar run next year as well. Skyworks stock is valued at $17.3 billion or 5x fiscal 2020 sales. It has an EV/EBITDA ratio of 10.7x. Though sales growth for fiscal 2020 is estimated at 1.3%, it might accelerate to 11% in 2021.
Analysts also expect earnings per share to grow by 4.1% in 2020 and 16% in 2021. Comparatively, the stock is trading at a forward price to earnings multiple of 13.6x. SWKS has a forward dividend yield of 1.8% and looks reasonably valued at the current price. With a payout ratio of 32%, Skyworks has enough room to raise dividend payments as its operating cash flow stands at a healthy $1.37 billion.
Qorvo stock is valued at $12.8 billion or 3.9x fiscal 2020 sales. It has an EV/EBITDA ratio of 12.5x. Sales growth for Qorvo’s fiscal 2020 is estimated at 2.1% and this might accelerate to 7.2% in 2021. Analysts also expect earnings per share to fall by 1.6% in 2020 and then rise 15.5% in 2021. Comparatively, Qorvo stock is trading at a forward price to earnings multiple of 16.8x.
The two stocks might increase investor wealth further, as strong holiday sales will drive record quarterly sales for Apple. However, a lot will also depend on the guidance provided by these companies.