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Morningstar | Skyworks, Qorvo, and Murata Manufacturing Appear Undervalued and Poised to Capitalize on 5G

Radio frequency, or RF, chipmakers have prospered in recent years due to increased complexity, integration, and filtering needs associated with 4G LTE networks and devices. As 5G networks are nearly upon us, we foresee an even greater need for RF content and design expertise to address new spectrum bands and technologies. In our view, 5G should prevent commoditization in the RF space and allow each chipmaker to provide unique solutions that will prevent device makers from playing off each other on price. In turn, we've raised our long-term revenue growth assumptions for a couple of RF leaders.

We are raising our fair value estimates for narrow-moat Skyworks Solutions to $113 from $106 and for no-moat Qorvo to $90 from $87, and we see attractive margins of safety in both firms. We also remain confident in our JPY 24,000 fair value estimate for narrow-moat Murata Manufacturing and consider it to be one of our Best Ideas in technology. In the near term, we recognize concerns about U.S.-China trade war tariffs and the quantities of Apple's iPhone units to be sold, as Apple is a key buyer of RF content. Yet in the longer term, we think these three RF leaders will grow stronger, not weaker, as they address their customer's greatest challenges of supporting 5G networks.

Ultimately, 5G content per device (especially in smartphones) remains uncertain today, but what is certain, in our view, is that RF complexity (and, thus, higher dollar content per device) will only increase with the rollout to 5G. A constant fear in the RF space is that mobile device titans like Apple and Samsung may push back on chip prices. RF leaders have created enough value in 4G that they were well rewarded for their cutting-edge products, and we think this will continue into 5G. RF firms should also benefit as a wider array of smart devices are connected to the Internet.

In the United States, Qorvo is perhaps best positioned to prosper in 5G, given its product breadth in smartphone RF content and its history as a supplier into infrastructure and defense systems that use advanced materials and technologies needed in 5G. We now model 6% long-term midcycle revenue growth for Qorvo, up from our prior estimate of 5%, thanks to our expectations for rising dollar content per device in 5G.

Skyworks Solutions has long remained an RF leader, thanks to its peerless integration of a wide array of components. Such integration should remain valuable in a 5G world and we don't foresee the company losing its leadership position any time soon. Similarly, we now model 6% long-term midcycle revenue growth for Skyworks, up from our prior estimate of 4%.

Murata Manufacturing appears to have promising 5G opportunities leveraging its rich product portfolio. Its expertise in multilayer ceramics and substrates will enable the company to grasp more growth opportunities in the RF space than in 4G, such as dielectric and low-temperature co-fired ceramic filters, both of which may emerge as options for 5G devices.

For further insight into RF chipmakers and their prospects in 5G, please refer to our newly published report "Filtering the 5G Radio Frequency Landscape."