This has turned out to be a forgettable year for Qorvo(NASDAQ: QRVO) investors as shares of the chipmaker are down 38% as of this writing, which is in stark contrast to the 23% gains clocked by the PHLX Semiconductor Sector index in 2024.
Known primarily for supplying smartphone chips to the likes of Apple(NASDAQ: AAPL) and Samsung, shares of Qorvo plunged following the release of the company's fiscal 2025 second-quarter results in October. Though the company's revenue and earnings were higher than Wall Street's expectations, its terrible guidance led investors to press the panic button.
Let's see why that was the case and check if Qorvo can ride the growing demand for artificial intelligence (AI)-enabled smartphones and witness a turnaround in its stock market fortunes next year.
Qorvo may remain under pressure in the near term
Qorvo's revenue in the second quarter of fiscal 2025 was down 5% year over year to $1.05 billion. The company's non-GAAP (adjusted) earnings fell to $1.88 per share from $2.39 per share in the year-ago period, a year-over-year decline of 21%. Analysts would have settled for $1.85 per share in earnings on revenue of $1.03 billion.
However, Qorvo was unable to follow up its better-than-expected results with a strong outlook. The company expects its revenue in the current quarter to land at $900 million, along with adjusted earnings of $1.20 per share. Analysts were looking for $1.06 billion in revenue from Qorvo, along with $1.92 per share in earnings.
So, Qorvo missed Wall Street's fiscal Q3 expectations by a huge margin, leading investors to press the panic button. Moreover, the company is forecasting its fiscal 2025 revenue and gross margin to be slightly lower than fiscal 2024 levels. Qorvo management blamed the shift toward entry-level 5G Android smartphones from mid-tier 5G smartphones for its poor guidance, adding that the company isn't expecting this trend to reverse anytime soon.
The shift toward cheaper smartphone models suggests that Qorvo may be selling lower-margin chips and generating lesser revenue when compared to chips that go into mid-tier smartphones. The company does point out that the demand for flagship and premium smartphones remains solid, but things aren't rosy in the lower tiers.
Qorvo's guidance for the current quarter indicates that its top line is on track to drop by 16% year over year. The bottom line will also take a big hit considering that it reported $2.10 per share in earnings in the year-ago period. Consensus estimates are projecting a 2.5% drop in Qorvo's top line this year to $3.68 billion, while earnings are expected to drop at an alarming pace of 22% in fiscal 2025 to $4.82 per share.
All this indicates that the new year may not start on a bright note for Qorvo. However, a closer look at the company's customer base and the potential developments in the smartphone market next year suggests that things could get better as 2025 progresses.
Why its fortunes could turn around in the new year
Market research firm Counterpoint Research estimates that the global smartphone market could clock 5% growth in 2024 to $1.23 billion units, followed by a 3% increase next year. However, there is one pocket within the smartphone market that's expected to post much faster growth -- generative AI smartphones.
Shipments of generative AI smartphones are expected to increase by 73% next year. Even better, IDC expects the generative AI smartphone market to keep growing at an impressive annual rate of 78% through 2028. Apple and Samsung are the leading players in this space. While Samsung is expected to finish 2024 with a 20% share in generative AI smartphones, Apple is expected to be the second-largest player with a 16% share.
This bodes well for Qorvo as these companies are its top customers. While Apple accounted for 46% of Qorvo's top line in fiscal 2024, Samsung produced 12% of its revenue. These two customers could drive a turnaround in Qorvo's fortunes next year. Apple, for instance, is expected to benefit from the growing adoption of generative AI smartphones following the release of its latest iPhone 16 models.
Though the tech giant is introducing its Apple Intelligence suite of generative AI features in a phased manner, a huge number of older iPhones that are in an upgrade window could encourage more users to buy its smartphones next year. This explains why analysts are expecting Apple's smartphone sales to increase by healthy double-digit rates over the next couple of years.
Similarly, Samsung is reportedly ramping up the output of its next generation of flagship Galaxy smartphones that are expected to go on sale early in 2025. As such, there is a chance that Qorvo's financial performance could start improving next year. Analysts are also expecting something similar, forecasting an acceleration in the company's top and bottom lines over the next couple of fiscal years.
If Qorvo's fortunes indeed turn around sometime in 2025, this semiconductor stock could get a nice shot in the arm next year and start soaring once again. That's why investors would do well to keep a close watch on Qorvo's quarterly results over the next few months and may even consider buying it once signs of a turnaround are visible.
Another important thing to note is that Qorvo is trading at a dirt cheap 11.4 times forward earnings and 1.7 times sales. Of course, the company's recent performance hasn't been good enough and that explains the cheap valuation. However, the prospects of the generative AI smartphone market and Qorvo's solid customer base could make it a value play in the future because of its valuation and a potential improvement in its revenue and earnings.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool recommends Qorvo. The Motley Fool has a disclosure policy.
