Will This Underdog Ever Become a Top Dog?

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I don’t know how many times I would be writing a “down but not out” sort of post about TriQuint Semiconductor (NASDAQ: TQNT). Less than three months ago, I truly believed that there were some solid reasons that could help TriQuint become a top dog. The stock actually did well since I last covered it and gained close to 20%. But much of that good work was undone as TriQuint shares crashed around 12% after it released its fourth-quarter report.

So do I write another post explaining why TriQuint is still destined for greatness like I have done on quite a few occasions in the past? The answer would be yes and no. Yes, because the fact that TriQuint is a cog in the ever growing mobile devices industry hasn’t changed overnight, and no because any premeditated thought would cloud unbiased judgment.

So, I’ll begin from the scratch, and check if the company can actually recover from the battering it is currently taking. But before that, let’s see why the stock is taking so much stick.

It’s all about the outlook

TriQuint delivered impressive fourth-quarter results, beating estimates on both top and bottom lines. However, a downright gloomy outlook for the current quarter sent investors panicking and shares packing. A revenue projection of $180 million to $190 million for the current quarter as against the consensus estimate of $205.1 million doesn’t make for a good reading. Also, an expectation of a loss of $0.12 to $0.14 a share against expectations of a break-even by analysts makes things worse.

But why such a sorry outlook? Well, it seems TriQuint sold a bit too much in the previous quarter, as its revenue came in $10 million ahead of guidance. One of TriQuint’s customers needed more of its products in the previous quarter in order to ramp up production. More clearly, Foxconn needed more chips to assemble more Apple (NASDAQ: AAPL) iPhone 5s and TriQuint had to satisfy its biggest customer’s need.

The latest iPhone’s supply problems were well-documented, and the Cupertino-based company took around two months since launch day to bring supplies up to speed just in time for the holidays. Thus, TriQuint saw a revenue shift from the current quarter to the previous one, and this it had not anticipated. As a result, it delivered a solid top line beat in the fourth-quarter, along with a lesser outlook.

But one needs to look beyond the outlook

Revenue wasn’t the only sticking point for TriQuint. Its gross margin declined to 30.7% in fiscal 2012 from 37.2% in the previous year. The company’s margins are suffering from low utilization rates, and the trend is expected to continue this year as management expects gross margin to range between 25% and 27%.

However, these low utilization rates didn’t just spring out of the blue. TriQuint has been adding capacity as it expects huge demand for its products going forward, and this seems logical since TriQuint’s chips enable connectivity in mobile devices and other applications. It counts Foxconn (aka Apple) as its biggest customer, deriving almost one-third of its revenue from them.

Hence, it’s not surprising when management says that they expect strong demand in the second half of the year, since that’s the time when Apple comes up with a new iPhone. Moreover, TriQuint’s new products have helped it land some more design wins, and we might see their effect as the year moves on. The current quarter’s outlook, both for revenue and margins, can be attributed to seasonality and the company is of the opinion that they will do better in the second half.

Another point which management noted over the conference call was that TriQuint is 98% booked to the mid-point of its guidance, which means that they still have some time to push beyond the projections.

Apple’s not a bane

Dependency on Apple for a large portion of revenue might also have a role to play in a depressed guidance, but this is nothing new. For instance, Cirrus Logic (NASDAQ: CRUS), which depends on Apple for a large, large portion of its revenue also guided below the Street. Its top line expectation of $200 million to $220 million came in well behind the Street’s $234.9 million estimate. But growth should eventually return once the seasonally weak quarters are out of contention.

Analysts at Barclays expect TriQuint to make $1.40 on every unit of the iPhone 5 sold. If Apple manages to sell 110 million iPhones over the next three quarters as analysts expect, TriQuint would surely stand to benefit to a great extent. Throw in the iPads, and the prospects become even brighter. Also, the company’s relationship with Samsung shouldn’t be forgotten since TriQuint has witnessed growth in that account as well.

For the future

TriQuint’s revenue from mobile devices has been on the rise and it saw a 66% surge in connectivity revenue in the previous quarter. The company’s 3G and 4G products are selling well, growing 12% sequentially in the last quarter. It expects the total addressable market for radio frequency solutions to grow, and this is actually a given since increasing sales of mobile devices along with multiple connectivity bands in a single device will aid the industry’s growth.

TriQuint has invested in capacity keeping the long-term in mind, and rightly so. In addition, they aren’t making such products that will result in lower margins. Thus, even though lower factory utilization might be a pain now, the company expects to get back up to speed in the future.  

TriQuint’s positives don’t stop here. It recorded an impressive 36% jump in its defense & aerospace business in the previous quarter while networking revenue improved slightly. Networking revenue should probably improve going forward as carriers start building infrastructure for faster networks. As far as defense and aerospace is concerned, TriQuint expects deployment of radar applications along with domestic and international aircraft to support this segment in the future.

Now what

There’s a lot to like about TriQuint, but the fact is that its financial performance would probably remain pressured over the next couple of quarters. The defense, aerospace and networking markets don’t move as fast as mobile, even though they are a $2 billion opportunity according to TriQuint. In addition, the mobile business would find the going tough due to seasonality.

Thus, if you’re expecting quick returns, then stay away from this stock. But if you’re willing to go the distance and live with the stock’s volatility, TriQuint might turn out to be a great investment since it makes chips that enable connectivity, and the world is getting more connected by the day.

TechJunk13 has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple, Cirrus Logic, and TriQuint Semiconductor. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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