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Morningstar | We Maintain Our FVEs for Skyworks and Qorvo Despite Concerns of a Ban on Chinese Key Customer Huawei

We will maintain our fair value estimates of $105 for narrow-moat Skyworks Solutions and $86 for no-moat Qorvo despite a 6%-7% decline in share prices on May 16. The sell-off likely stems from the United States' decision to add Huawei to its "Entity List," which may prevent U.S. firms (such as radio frequency chipmakers like Skyworks, Qorvo, and others) from supplying into the Chinese networking equipment leader unless a special license is granted (with uncertainty whether the U.S. will in fact grant licenses to Huawei's suppliers, either near term or long term). Despite the uncertainty, we maintain our long-term base case fair value estimates for both Skyworks and Qorvo, which implies a resolution of these trade tensions at some point down the line without a structural destruction in RF chip demand from Chinese customers. We continue to view both firms as undervalued and still view Skyworks as one of our best investment ideas in the tech sector.

Huawei has regularly been a 10% customer of Qorvo's, while Skyworks noted Huawei as a 10% customer in fiscal 2017 but not fiscal 2018, so we assume Huawei makes up a high-single-digit portion of Skyworks' revenue today. We concede that near-term RF chip sales into Huawei might be weak in the next quarter or two, especially in light of concerns that Huawei was stockpiling chip inventory in the March quarter as protection from such a potential ban. Similarly, a longer-term ban that cripples Huawei would also cause pain to RF chipmakers. While the outcome of U.S.-China trade discussions remain highly uncertain, which may continue to lead to volatility in RF chip stocks in the near-term, we are not yet ready to model a destruction in long-term chip sales into Huawei as negotiations remain fluid. Quite simply, we don't believe Huawei has many alternatives to these RF parts from non-U.S. suppliers, so we don't foresee a mass exodus away from Skyworks or Qorvo any time soon.

We note that the prior ban (and ultimate reversal) on ZTE in 2018 had a minimal effect on Skyworks' and Qorvo's results, and at this point, we assume the same for Huawei, more so because of the potential that the Huawei ban is reversed sooner rather than later as part of broader trade talks than because of immateriality associated with Huawei itself. Just as the ZTE ban was considered to cripple the Chinese networking equipment maker in 2018, a similar Huawei ban might be just as punitive. Yet crippling these large firms wouldn't simply hurt China, but also U.S. firms given the entanglement within the tech supply chain. Thus, we're not entirely sold that the Huawei ban will last forever as other trade discussions are ongoing. In turn, we are maintaining our fair value estimates under the assumption that the Huawei ban (and potential pain to RF chipmakers) is part of broader negotiations that may ultimately be resolved.

For further insight into the 5G RF landscape, please refer to our October 2018 special report, "Filtering the 5G Radio Frequency Landscape."