Investment bank JPMorgan has been looking into the advent of 5G, and pointing out possible paths that the new technology will take as it makes inroads to the digital ecosystem. The most obvious point, of course, is that by the end of this year all of the major mobile providers will have rolled out nationwide 5G networks. That shift has already begun.
What is equally important, but less obvious, is that paths toward monetization are not completely clear. JPMorgan does not expect digital customers to pay for 5G specifically in selecting new plans. Customer choice of provider may hinge on the type of spectrum offered in the new networks. As of now, most are still in the low bands. Early adopting customers will see the largest – and most immediate – benefits, as they will enter mostly empty networks. As the spectrums fill – with open channels and active customers – connection speeds will slow. Late adopters will see less benefit from 5G.
From the provider end, one key factor will be availability of processor chips. It’s been mentioned before that chip makers, who have had a hard time in recent years due to the US-China tariff dispute, are poised to benefit from the 5G switch. They are looking at increased production and sales, while their stock prices are depressed, offering investors a relatively low point of entry in time to take advantage of that likely increase in commerce.
We’ve use TipRanks’ Stock Screener tool, with the search parameters set for a Buy rating and an upside greater than 10%, to pull up three of the chip maker stocks that JPMorgan has tapped as Buys in the 5G runup. Let’s take a closer look:
Qorvo, Inc. (QRVO)
First on our list is Qorvo, a maker of integrated circuit chips for wireless communications applications. These are the chips that allow your smartphones and PCs to connect to your home wi-fi signal. Qorvo chips are also used in industrial radio, wireless security, remote meter reading, and cordless phones. The company is a relative newcomer, founded in 2015 through a corporate merger.
In recent years, Qorvo has been impacted in multiple ways by market forces. The trade war, mentioned above, put pressure on chip industry generally, but Qorvo’s exposure to Apple led it, in late 2018, to lower 2019 guidance. The maturation of the smartphone replacement cycle, slowing down demand for wireless connection chips, hurt the company, as did competition from Broadcom for iPhone business in mid-2019.
However, Qorvo has been on an upswing in recent months. Fiscal Q3 2020 results, reported at the end of January, beat the forecasts and showed modest gains year-over-year. The top line revenue came in 2% above estimates, at $869 million, for a 4.4% yoy gain. EPS was up only a half-percent yoy but was 11.4% above forecasts at $1.86. the company’s Mobile Products business was a major driver of the gains.
JPMorgan’s 4-star analyst Bill Peterson stated in his recent note on QRVO, “Qorvo remains well-positioned to benefit from 5G ramps with key design wins in hand and on increasing wireless infrastructure investments as we move through the 2020. The team maintained its above market/consensus expectation of 5G smartphone units for 2020, which would reflect upside to our estimates. However, more important in our view, is the significant content growth opportunities the team is capturing. Despite 5G-led growth, the company provided a conservative view on the June quarter (initial view of Q/Q revenue decline), which takes into account potential impacts from the Coronavirus.”
Peterson bumped his QRVO price target up 22% to $135, and reiterated his Buy rating on the stock. His new price target indicates confidence in a 28% upside to QRVO. (To watch Peterson’s track record, click here)
Overall, QRVO shares rate a Moderate Buy from the analyst consensus. This is based on 17 recent reviews, with a 10-7 split between the Buys and Holds. Shares are priced at $104.19, and the $129.93, average price target suggests an upside of 24%. (See Qorvo stock analysis at TipRanks)
Next up is Qualcomm, the main supplier of modem chips to Apple’s iPhone line. Qualcomm has cemented this position – and excluded competitors – as part of its royalty dispute settlement with Apple. The settlement, reached late last year, also included a large monetary transfer in QCOM’s favor.
Qualcomm reported its fiscal Q1 2020 just last week. EPS, at 99 cents, beat the forecast by 14%, although it was down 17% year-over-year. Revenue did better, beating the forecast by 5.2% and growing 4.9% yoy. The reported top line was $5.08 billion. QCOM shares have overperformed in recent months – the stock is up 24% in the last 6 months, against a NASDAQ gain of 18%.
As it starts a new fiscal year, Qualcomm is taking a cautious outlook. The company sees a slower 5G ramp in China, partly due to the Coronavirus outbreak impacting travel and trade patterns. More importantly, the company sees the overall slowing in smartphone demand – as the replacement cycle for devices matures, resulting in longer device lifespans – as the key driver in chip demand. This leads back to the Apple settlement, which has locked in a major customer for QCOM.
4-star JPM analyst Samik Chatterjee brings these points together in his note on QCOM shares. He writes, “Key points we would highlight to investors to address these concerns include: 1) 5G content increase, which is the underlying driver of the bull case for QCOM shares, remains intact and is delivering ahead of expectation; 2) Tough near-term unit outlook is more reflective of current market conditions, which are likely to drive smartphone industry volumes down y/y in the March quarter; and 3) Gross margin improvement is on track for QTL and QCT segments, and total company gross margins are moderating entirely driven by mix of revenues between QTL and QCT. We maintain our favorable view of the 5G content opportunity..”
Chatterjee’s Buy rating is supported by a $105 price target, suggesting an upside of 20%. (To watch Chatterjee’s track record, click here)
Overall, the stock has a $100 average price target, implying an upside growth potential of 15%. The analysts are split on the stock, with 10 saying Buy and 8 saying Hold, giving the stock a Moderate Buy from the analyst consensus. (See Qualcomm stock analysis at TipRanks)
Marvell Technology (MRVL)
Marvell is a smaller player in the semiconductor chip industry, but it maintains a world-wide presence with offices and facilities in 14 countries. The Silicon Valley company saw strong revenues in fiscal 2019, over $2.86 billion, and net profits of $179 million.
The company positioned itself well last year, partnering with Samsung on 5G development and working to acquire competitors Avera and Aquantia – Avera in a deal worth $650 million and Aquantia for $450 million. Both moves were made in cash, a measure of Marvell’s fundamental strength.
That strength was not clear in the Q3 results. EPS met estimates, at 17 cents, although revenues just missed at $662 million. The company chalked up the declines to seasonal slowdowns in demand. The balance sheet, however, showed $438.4 million in cash on hand – a drop of only 23% despite the company spending $1.1 billion during the year on acquisitions.
The company also maintained its dividend payment during the quarter. At 6 cents per share and 1% yield, the dividend is small – smaller even then the yield on Treasury bonds – but it is reliable. The company has an 8-year history of keeping up the payments, and the payout ratio of 85% indicates that the payment is easily sustainable. It’s an added incentive for income-minded investors.
Harlan Sur, a 5-star analyst with JPM, sees Marvell in a good place to benefit from 5G rollout. The analyst has recently met with Marvell’s CFO Jean Hu and Head of IR, Ashish Saran in Silicon Valley and “came away confident that the team is well positioned in 5G as it continues to ramp strongly into Samsung and remains on track to ramp Nokia in 2H20.” The analyst noted, “We maintain our expectation of Marvell being well on the way to becoming a networking/ASIC/5G powerhouse and we continue to see upside to OW-rated MRVL shares from current levels.”
Sur’s $31 price target suggest an upside of 29% on MRVL shares, and backs up his Overweight rating. (To watch Sur’s track record, click here)
Marvell’s Moderate Buy consensus rating is based on 9 Buys given recently, along with 2 holds and a single Sell. It’s a bargain stock for the chip industry, priced at just $23.69. It has an average price target of $28.83, which indicates an upside potential of 22%. Along with the modest dividend, that gives the stock a high return potential. (See Marvell stock analysis at TipRanks)