The Market Hasn’t Recognized This Stock’s Potential Yet, but You Should

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

Radio frequency components maker RF Micro Devices (NASDAQ: RFMD) has been growing at a rapid pace, but sadly, its share price performance so far this year does not reflect the same enthusiasm. The stock is up just 10% this year, significantly lagging the performance of the NASDAQ Composite index.

One would be surprised at such a muted performance, especially considering that the company’s revenue in its recently reported first quarter jumped an astounding 45% to a record $293 million, comfortably ahead of the $288 million consensus and the company’s own outlook. In addition, adjusted earnings also improved significantly to $0.09 per share from last year’s $0.01 a share, and once again, ahead of the $0.07 Street estimate.

This stellar performance was not a fluke, as RF Micro reported similar growth when it released its fourth-quarter report in April. Even its outlook was pretty good, with the company projecting revenue of $305 million to $310 million and earnings of $0.10-$0.11 per share, both ahead of consensus estimates at the mid-point.

Bogged down

But despite such terrific performances, the market has not recognized the company’s potential, and it is being held back by certain apprehensions. The stock has been going downhill despite reporting such terrific numbers as certain analysts suggest that its growth won’t be as stellar going forward.

For instance, Barclays analyst Blayne Curtis (via Barrons) states that “We do believe RFMD has executed well but we now see more risk to estimates than upside and believe investors will be unwilling to assign a premium multiple given the uncertainty in the mobile market.”

But, even if RF Micro is facing any sort of uncertainty, its revenue outlook for the current quarter suggests that it would still record year over year growth of 47% when it next releases earnings. But, we are not interested in investing for just one quarter, and on further due diligence, it becomes clear that RF Micro has some more catalysts that should be taken into account.

Think long-term

Firstly, it should be considered that RF Micro is not dependent on just one smartphone maker. While analysts might have cited Samsung’s (NASDAQOTH: SSNLF) recent troubles selling its flagship Galaxy S4 and cut down sales projections by 30%, it should be kept in mind that this is a short-term weakness at best. While an inventory correction by Samsung could hurt suppliers like RF Micro in the interim, Samsung would again be back with a new flagship next year, leading to revenue growth for its component suppliers.

Moreover, Samsung is still growing rapidly as far as shipments are concerned, and that’s what should matter for a component supplier. The Korean giant’s unit shipments grew 53% in the second quarter, according to IDC. And now, as Samsung takes the backseat and prepares its next iteration of the Galaxy, Apple (NASDAQ: AAPL) will take center stage.

A big opportunity

RF Micro had supplied a couple of chips for the iPhone 5, and it has reason to be doubly excited this time. Apart from the expected iPhone 5S, which is rumored to be released on Sept. 10, recent leaks suggest that a mid-range version of the device, the iPhone 5C, might also be on the way.

Now, a cheaper version of the device might help Apple crack the code in certain emerging markets such as India, where iPhone sales grew 400% in the previous quarter on the back of the cheaper iPhone 4.

If consumers are getting an affordable, brand new device in a developing nation such as India, where an average consumer will have to save for eight months to buy the current iPhone 5 (based on monthly per capita income of around $95), then Apple can certainly expect to sell more as the iPhone will become a mass market commodity rather than a luxury.

I’m not going into the discussion regarding Apple’s brand dilution in this case. RF Micro investors should be concerned with a higher number of shipments of chips, which would probably be the case if Apple does introduce a cheaper version of the device and RF Micro lands a spot in it (a possibility considering its strong outlook despite Samsung’s production cuts).

Beyond the big two

Management cites the importance of diversification, and RF Micro indeed has a diversified customer base, as even Nokia and BlackBerry are also among its clients. Moreover, the company is also well-placed to benefit from growth in data connectivity. The company expects to benefit from the rollout of TD-LTE in China this year, as Chinese mobile major China Mobile prepares to deploy its 4G network.

RF Micro seems to have landed design wins in certain Chinese smartphone makers as well, and the company might also see revenue from Huawei and ZTE according to management’s commentary on the conference call. The Chinese smartphone market is rapidly growing and given the fact that RF Micro is witnessing solid growth at its Chinese clients, I see no reason why the company’s growth should stop.

The bottom line

What’s more, the stock trades at just 8.5 times forward earnings and earnings are expected to grow an impressive 30% in the next fiscal year according to analysts. So, RF Micro Devices is a company with a lot of potential, and the good thing is that it hasn’t run up too far. All this makes RF Micro a worthy investment if you're looking for a company that will lead you to smartphone riches.

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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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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