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Morningstar | RF Chipmakers Remain Materially Undervalued Despite Apple's 1Q iPhone Warning. See Updated Analyst Note from 02 Jan 2019

We are trimming our fair value estimates for narrow-moat Skyworks Solutions to $105 from $113 and for no-moat Qorvo to $86 from $90, as both firms are key radio frequency chip suppliers into Apple, which slashed guidance for December quarterly revenue due to weaker-than-expected iPhone sales, particularly into China. Nonetheless, we continue to believe that the sell-off in both Skyworks and Qorvo in recent months is overdone and we still see attractive buying opportunities in both names for long-term, patient investors. While iPhone sales will likely be quite weak in the near term, especially as Chinese New Year demand seems unlikely to materialize this year, we still view shares in both Qorvo and Skyworks as priced as if a majority of their iPhone revenue will evaporate going forward, which we see as unlikely. Skyworks remains one of our Best Ideas within the Tech sector.

Given the strength of Apple's narrow moat, stemming from customer switching costs around iOS, we suspect that the pause in iPhone sales is due to an elongating replacement cycle and macroeconomic concerns driving fewer unit sales of these higher priced devices. As Apple's number of active devices and sales of ancillary products (like wearables) continue to rise, we don't believe the iPhone is in a free-fall as users depart for Android. Thus, we still anticipate significant demand for RF chips from Skyworks and Qorvo going into iPhones in the years ahead. We continue to believe that both Skyworks and Qorvo will retain share within future iPhone models as both firms are part of a small handful of RF suppliers that have the capacity and expertise in RF chip design, manufacturing and packaging needed to supply billions of parts worldwide. Finally, for similar reasons, we don't foresee Skyworks or Qorvo taking a massive haircut on RF chip pricing in the years ahead, as wireless signals continue to only increase in complexity, especially in 5G.

We note that Qorvo earned 36% of revenue in fiscal 2018 from Apple (ending in March 2018). Skyworks had even greater exposure in its fiscal 2018 (ending in September 2018), with 47% of revenue coming from Apple. We suspect that Skyworks also benefitted from content within Apple wearables to a greater extent than Qorvo in recent quarters. Regardless, despite Apple's near-term weakness, we don't foresee this revenue going to zero for either firm any time soon.

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