It's been a month since I last wrote an article on RF Micro Devices (RFMD), and the stock has already appreciated nearly 18%. I think the stock could've rocketed higher, but the company's below par quarterly reports has instilled fear in some investors. RF Micro's shares dropped in post-market trading following the release of the company's fiscal Q3 2014 result; however, it has resurrected its upward trajectory since then. Currently, RF Micro Devices is trading at over $5.60, and there are numerous reasons why I think it will continue to rise higher throughout the year. Let's take a look at the reasons one by one.
Quarterly Report Not As Bad As It Looks
For the reported quarter, RF Micro's revenue came in at $288.5 million, up 6.6% year-over-year, while net profit was $36.4 million, which translates into EPS of $0.13. Though the company met the analysts' estimates on earnings, it fell well short of their revenue estimate of $320 million. But the good news is that the company's gross margin jumped 530 basis points to 37.3%. RF Micro's CFO, Dean Priddy, has often paved the way for gross margin expansion and will continue to do so as the company expects non-GAAP gross margin of approximately 40% in the next quarter. Increasing gross margin and cost-cutting initiatives make RF Micro Devices a luring and unique investment which definitely deserves a place on your portfolio.
Apple Will Drive Growth
Currently, Apple (NASDAQ:AAPL) generates more than half of its revenue from the iPhone line of smartphones, thus it doesn't come in as a shock that it is working hard to expand its carrier base. Apple signed a deal with China Mobile (NYSE:CHL) during the end of 2013, and it is proving to be fruitful, as Apple has already shipped nearly 1.4 million iPhone 5s units. Analysts are estimating that Apple could perhaps sell an additional 20 million iPhones in China in 2014.
No doubt the Chinese market presents a key growth opportunity for Apple; however, the company is also focusing on other parts of the world.
In an interview with the Wall Street Journal, Tim Cook, Apple's CEO, said:
The China Mobile roll-out of LTE (fourth-generation wireless) takes place over a year. And even with adding China Mobile, we still only present our products to two-thirds of the subscribers in the world. In fact, this quarter, we'll sign on 50 new carriers.
This is expected to drive up iPhones' sales and is very good news for RF Micro Devices. Investment bank Canaccord reported that RF Micro's components represent a larger share of the value of an iPhone. This means RF Micro's dollar content in the iPhone has grown over time and a "teardown" of the new iPhone 5S shows that RF Micro won at least three spots in the device.
Samsung Will Also Drive Growth
While bears claim that RF Micro devices is too exposed to Apple, it is actually Samsung which is RF Micro's largest customer and accounted for nearly 22% of RF Micro's total revenue in the previous fiscal year. In addition, Samsung also presented RF Micro with its Quality Grand Award at a ceremony held last week at Samsung Electronics' smartphone manufacturing operations in Gumi, South Korea.
Currently, the company trades at 9.78 times its 2014 earnings and 1.3 times its 2014 revenue estimates, which is fairly cheap for a tech company with strong prospects. In fact, the company is really undervalued and is cheaper than all of its peers like TriQuint (TQNT), Broadcom (NASDAQ:BRCM) and Skyworks Solutions (NASDAQ:SWKS). Also, RF Micro has been gaining content at important smartphone suppliers and is well set to benefit from Apple's sales driving initiatives and Samsung's Galaxy S5. In addition, the company has also diversified its Wi-Fi business by adding two new front end modules. So, I think RF Micro Devices is a great buy at present valuations.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.