A surge in sales of AI-enabled smartphones could prove to be a catalyst for this chip supplier.
Artificial intelligence (AI) is having a positive impact on numerous industries around the world, and the smartphone market is one of them. The advent of generative AI has given smartphone sales a nice boost after a few difficult years of declining sales.
The smartphone market shrank by 11% in 2022, following a 3.2% decline last year. This explains why shares of Qorvo (QRVO)a well-known supplier of smartphone chips for Applehas remained virtually unchanged over the past few years. However, Qorvo’s recent results suggest that its fortunes on the stock market could change for the better later this year.
Let’s take a closer look at Qorvo’s latest quarterly results and find out why buying this semiconductor stock right now could prove to be a smart move.
The AI smartphone market will open up new growth opportunities for Qorvo
Qorvo reported first-quarter fiscal 2025 results (for the three months ended June 29) on July 30. The company’s revenue rose 36% year-over-year to $887 million, while non-GAAP earnings rose to $0.87 per share from $0.34 per share in the same period last year. Analysts would have been satisfied with earnings of $0.71 per share on revenue of $852 million.
Investors should note that Apple is Qorvo’s largest customer, accounting for 46% of its business last year, while Samsung accounted for 12% of Oorvo’s revenue. While one of the two already dominates the market for generative AI-enabled smartphones, the other is expected to enter that market very soon.
More specifically, Samsung’s Galaxy S24 devices took the top three spots on the list of best-selling generative AI smartphones in the first quarter of 2024, with a market share of just over 58%. Qorvo management pointed out on the company’s last earnings call that it “achieved excellent dollar content and they’ve had a pretty good increase.”
This probably explains why Qorvo saw strong year-on-year growth last quarter. And now Apple could give Qorvo a boost as we head into the final stages of 2024. That’s because Apple’s upcoming iPhone models, which could launch next month, are expected to be AI-enabled. The tech giant recently announced that it has developed a set of AI-focused features known as Apple Intelligence, which are expected to make their way into the new generation of iPhones.
Apple’s launch of an AI-powered iPad in May this year led to a healthy increase in iPad sales last quarter, up nearly 24% year-on-year. It wouldn’t be surprising to see something similar happen with the iPhone lineup, especially considering that generative AI smartphone shipments could grow by a staggering 78% annually through 2028.
Apple’s entry into the generative AI smartphone market with its new iPhone lineup could open up new growth opportunities for the company and revive interest in a product whose sales stagnated last quarter. Bloomberg, for example, expects AI to boost iPhone sales by 10% year-on-year in the second half of 2024.
This is a good sign for Qorvo, as the company appears to be on track to integrate more content into Apple products. On the recent earnings call, CEO Robert Bruggeworth noted:
In mobile, primarily smartphones and tablets, our biggest opportunity continues to be with our largest customer. We are investing in several multi-year programs to expand our content and continue to grow revenue with this customer. R&D investments for future programs include both products we currently ship to this customer and new products we do not currently ship.
This probably explains why analysts have been raising their revenue expectations for Qorvo recently.
QRVO revenue estimates for the current fiscal year, data from YCharts
The valuation makes the stock a tempting buy
Qorvo’s improved revenue growth prospects are also expected to impact its bottom line, as evidenced by the chart below, which shows us that the company is expected to deliver healthy earnings growth over the next few fiscal years.
QRVO EPS estimates for the current fiscal year, data from YCharts
Qorvo is currently trading at just 16.4 times forward earnings, which is a nice discount to the Nasdaq-100 the index price-to-earnings ratio of 28 (using the index as an indicator for technology stocks). Assuming the company can actually generate earnings of $10.17 per share after a few years and continues to trade at an attractive price-to-earnings ratio of 16.4 at that time, its share price could reach $167 in the long term.
That suggests a 54% upside from current levels. However, if the market decides to reward Qorvo with a higher earnings multiple due to its AI-driven growth, this chip stock could deliver much healthier gains over the long term. That’s why investors looking to add a cheaply valued AI stock to their portfolio should take a closer look at Qorvo before it gets a bull run.
Harsh Chauhan does not own any stocks mentioned. The Motley Fool owns and recommends Apple. The Motley Fool recommends Qorvo. The Motley Fool has a disclosure policy.
