RF Micro Devices’ (RFMD, Financial) recent declaration that it intends to team up with its fellow chip maker TriQuint Semiconductor has given a big push to its stock. Due to its cost synergies and market share gains, RF Micro should continue getting better.
Besides, the company looks strong to gain additional margins going forward, as it concentrates on various initiatives such as cost reduction and increasing the operational efficiency.
Moreover, RF Micro is experiencing strong order activity in the market as its strong design win activity in its flagship smartphones and tablets are driving its growth. Hence, the company is likely to perform even better in the second half of the year.
Apple is a catalyst
RF Micro Device has numerous opportunities to increase its dollar content. According to Canaccord Genuity, the company has won a lot of content inside Apple’s latest iPhone 5S. Also, the company is expected to benefit largely from Apple’s new iPhone. On the other hand, Apple is expected to manufacture bigger screen smartphones to win market share from Android.
In addition, New York Times has revealed that bigger screen smartphones are driving the market. For instance, China recorded that 20% of all smartphones that were shipped last year were five inches or larger. Moreover, such big screened phones, known as phablets, are just 4% of smartphone sales in the U.S. So, if Apple introduces a bigger iPhone, it will be able to tap a big market. As a result, even RF Micro Devices will benefit as it is a component supplier to the smartphone giant.
Other opportunities
The Internet of Things is creating a big market for the company as a result of growth in embedded connectivity, connected homes, automotive Wi-Fi, and wearable technologies.
Also, as telecom carriers are creating another opportunity for RF Micro as they are shifting to new technologies such as envelope tracking, carrier aggregation, and transmit MIMO to address the increasing requirements for always on broadband data, which increases RF Micro’s dollar content opportunities. The roll out of TD-LTE and LTE advanced is leading to more LTE content in mid-tier smartphones, while in developing economies, consumers are switching from 2G phones to high-dollar content 3G smartphones.
Furthermore, the consistent adoption of RF Micro’s ultra-low cost CMOS power amplifiers in next-generation handset platforms have become accretive for the company. Also, its margins are expected to grow due to the migration of its largest customer for CMOS PAs to ultra-low cost products. Also, the company is expected to start shipments to an additional tier one customer that will drive its growth further in the market.
Making the business more efficient
The company has also said that it will be implementing a flexible sourcing strategy of raw materials to reduce gas and silicon costs, as it has gathered assembly capabilities to reduce packaging costs. Also, it is lowering the content of precious metals in its manufacturing process, while pushing forth higher volumes across its supply chain to bring costs down further.
Besides, its flexible sourcing strategy could turn out to be a huge advantage for the company. RF Micro has reduced its manufacturing footprint and its fixed asset base significantly over the past few years. It has sold its MBE facility and its gallium arsenide fab in the U.K., and has expanded its external sources of supply.
The company looks well-positioned with respect to its internal and external resources with fluctuations in demand, and this will support a better margin performance. The combined capabilities of its gas fab and its external foundries are well-equipped to satisfy the full breadth of customers’ performance, size, and cost requirements.
RF Micro has also installed and qualified additional assembly capacity at its Beijing facility. A margin boost can be expected as this move will reduce its reliance on external suppliers, while its internal production capacity will run at better utilization rates.
Conclusion
The company is expected to grow at a compound annual growth rate of 18% for the next five years. It could even cross this growth rate as the merger with TriQuint will bring more synergies in the market and drive its stock. Also, RF Micro trades at a forward P/E of just 13. Hence, investors shouldn’t miss the stock as it has strong growth prospects.
