When Apple Inc. AAPL struggles with the iPhone, suppliers like Qorvo Inc QRVO suffer along with Cupertino. Yet an analyst at Goldman Sachs thinks the time is ripe to buy Qorvo stock.
The Analyst
Analyst Toshiya Hari upgraded Qorvo from Neutral to Buy and hiked the price target from $66 to $79, representing 14-percent upside potential.
The Thesis
The risk-reward on Qorvo is skewed positive given the scope for upward revisions to EPS estimates over the next 12-24 months, Hari said in the Wednesday upgrade note.
Goldman's Buy rating is an "out-of-consensus" call, as 58 percent of Qorvo analysts have Neutral ratings and 4 percent have Sell ratings, the analyst said.
"The risk is we are a quarter early in making this call," Hari said.
Hari named the following reasons for his constructive view on Qorvo:
- The smartphone market is showing early signs of stabilization in units, as near-term upside in China likely offsets marginal weakness at Apple.
- 5G infrastructure is showing strength; Goldman's recent checks at the Mobile World Congress suggest the strength is sustainable through 2020-2021. Qorvo's base station accounted for about 30 percent of Infrastructure and defense products segment sales, which constitute about 10 percent of total sales.
- Goldman sees margin expansion opportunity given the company's guidance for a 47-percent non-GAAP gross margin for the March quarter, 170 basis points below consensus. Margins are likely to expand over the next 12-24 months due to ongoing restructuring initiatives and other cost-cutting initiatives, along with a better business mix from above-average growth in the IDP business, Hari said.
- Free cash flow generation is likely to improve further in fiscal 2020-2021 due to anticipated operating margin improvement, disciplined working capital management and reduced capex intensity.
- Goldman sees the current valuation as compelling, as it underappreciates the top- and bottom-line growth potential of the company.
The Price Action
Qorvo shares were rallying 4.79 percent to $72.43 at the time of publication Thursday.
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