Keep an Eye on this Beaten Down Chipmaker

Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Companies meeting expectations on earnings but faltering on outlook has been a common feature this earnings season. And sometimes, we have seen some nice value plays open up. Last week, RF Micro Devices (NASDAQ: RFMD), a maker of radio frequency (RF) chips, took the same route. Although the company did well to match analyst expectations, a glum outlook for the current quarter sent the stock packing.

But being a component supplier for mobile devices is an advantage which shouldn’t be ignored straightaway. Let’s take a peek into RF’s past and see how it is making an effort to get back on its feet again.

A tale of failed clients

RF’s fortunes have swung wildly over the years. The company, which enjoyed a very, very close relationship with Nokia (NYSE: NOK) for a long time and saw the best of times, is now languishing excruciatingly close to its 52-week low. Nokia used to be the largest customer of RF for a pretty long time, constituting as much as two-thirds of its top line. However, as Nokia’s fortunes faltered, so did RF’s.

But RF had long known that its dependence on Nokia might cost it dear in the long-term. Hence, the company started to diversify its customer base over time. And last year, RF had reduced its dependence on Nokia to less as 15%, although not insignificant but still a lot lower than what it used to be.

RF also counts another struggling smartphone maker in the form of Research in Motion (NASDAQ: BBRY) on its client rolls. Although RIM was not as big a customer as Nokia, but when your client’s business is faltering, it will indeed have an effect on your revenue.

Deciphering the downbeat outlook

But that’s the past. RF is now looking to get better with time, a reason why I think it would probably make sense to keep an eye on it, and especially considering that it’s trading at such a cheap price.

The primary reason behind RF citing a weak second quarter was a delay in orders by its customers. You have already met some of the customers, and throw HTC into the fray. With RIM delaying the launch, and hence the production, of its BlackBerry 10 phones and both Nokia and HTC falling prey to weak economic conditions, RF found the going difficult. So it’s a case of bad timing that resulted in a downcast outlook. As these manufacturers ramp up production, it would benefit RF’s top line and infuse the much needed revenue growth the company is looking for.

Now it’s getting better

But, I know you won’t be entirely convinced about RF since I am pinning my optimism on a bunch of smartphone makers who have endured difficult times and whose prospects are not quite looking up. But there’s more than just these customers.

RF has seen its 3G/4G component sales grow impressively this year, a trend which has a good chance of continuing in the long run as more consumers use mobile devices and consume more data. Also, RF has been knocking on the door of Samsung for quite some time now, and the results are now beginning to show. Samsung is now RF’s largest customer and both companies will work closely on a number of flagship smartphones to be released by the Korean giant going forward. With Samsung’s Galaxy S III behind it and no major launch in the offing, there’s again no major driver for revenue in the current quarter.

Now after reading all the stuff above, it does seem that the punishment meted out to RF was a bit too harsh as the company does have some tailwinds towards the back end of the year. And again, there’s another possibility which might improve RF’s standing. RF might see more revenue coming into its coffers from Apple (NASDAQ: AAPL). It looks like RF might make 60 cents on every unit of the next iPhone, which is set to be launched pretty soon. Although not a very high number, but a budding relationship with Apple is certainly not harmful for any component supplier.

RF’s relationship with Apple finds some more credibility going by what CFO William Priddy told Davenport & Co. analyst Drake Johnstone in early June. Going by Priddy’s comments, Johnstone is of the opinion that RF is indeed a supplier to Apple.

The takeaway

RF Micro Devices has been through the worst of times as its clients have seen their own prospects wither away. But with time, it has gradually diversified its clientele and might see better times ahead. Considering RF’s really, really low price (below $5) and improved possibility of gaining from the smartphone revolution ahead, the stock might prove to be a trump card in your portfolio if you are willing to take the plunge.

Still in doubt whether to go for RF Micro or not? Add it to your Watchlist by clicking here so that you can track the latest news and analysis on the stock and check for yourself when it begins its journey north. 


TechJunk13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple and Nokia. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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