I have recommended buying RF Micro Devices (RFMD) twice in the last three months. Shares have popped up over 65% and 30% since I recommended it on 13th January and 12th February, respectively. However investors who have missed out shouldn't worry as I still have high hopes for this Apple (NASDAQ:AAPL) supplier and I reckon that it will move up further in the coming months. The company still has a lot of room to grow and the merger with TriQuint (TQNT) has opened up many opportunities. Let's take a look at RF Micro Devices' prospects.
Merger With TriQuint
The all-stock transaction with TriQuint will create a new company, called NewCo, which will have combined revenue of over $2 billion. NewCo will be able to supply parts to both Apple and Samsung (OTC:SSNLF) and the synergies between RF Micro and TriQuint will save the company nearly $150 million over the next two years. Apart from the smartphone market, this merger will also create huge opportunities in network infrastructure and aerospace. Bank of America upgraded RF Micro Devices from neutral to buy, revising its price target to $10. BofA's analyst noted:
We upgrade RFMD to Buy with $10 PO, or ~40% upside potential from current levels, as its proposed merger with TriQuint would bring together the #3 and #4 players in the radio frequency chip (RF) market to create a powerhouse with ~35% share. RFMD's strong portfolio of power amps and switches combined with TriQuint's filters brings strong product, sales and cost synergies for 3G/4G smartphones, tablets and other connected devices. Also, ~25% exposure to high margin (55% GM, 30%+ OpM) and long life-cycle military/infrastructure adds defensiveness to the business model.
In addition to the cost saving, this merger will also boost NewCo's production scale, which will ultimately enable the company to gain market share from its rivals in the smartphone business.
Benefiting From The Smartphone Market In 2014
The Samsung Galaxy S5 is off to a flying start as the pre-orders for the device exceeded S4's by a whopping 130%. The Galaxy S5 is expected to hit the worldwide market on 11th April. Once Samsung is through with the production of the Galaxy S5, Apple will facilitate RF Micro Devices to sustain its momentum. Buying an Apple supplier just before the launch of a new product can be very lucrative for investors if the device lives up to the hype. Shares of almost all Apple suppliers jumped after the successful launch of iPhone 5S and the same may happen again. Here's why.
Even though Samsung Galaxy S5 was off to a great start, it may not have satisfied tech fanatics. The company disappointed its fans on many fronts. First, the company didn't experiment with the design and gave the S5 the same old rectangular look. In addition to that, people across various social platforms are comparing the design of the Galaxy S5's rear panel to a band-aid.
Also, people were waiting for Samsung to update its Touchwiz software; however the company didn't add many new features. All in all, the Galaxy S5 has been just a slightly improved version of its predecessor, the Galaxy S4, and this can ultimately boost the sales of iPhone 6.
Tech fanatics are expecting many things from the iPhone 6 and if rumors are to be believed, Apple will fulfill those expectations. Apple is planning to launch devices with bigger screens as it is targeting markets where larger screen sizes are in vogue and the latest rumors suggest that Apple is preparing the iPhone 6 with a 4.7-inch screen this year. In addition, both Canaccord and Forbes are confident that the iPhone 6 will come with a durable sapphire display with a bezel-free design. This will make the device stronger and thinner. Apart from this, rumors suggest that Apple will add many new features like a better processor, improved camera, upgraded display technology etc.
Also, Apple is aggressively looking to improve its sales and CEO Tim Cook has announced that 50 more carriers will get the iPhone in the current quarter, globally, according to The Wall Street Journal. Both RF Micro Devices and TriQuint are strong Apple suppliers and all these initiatives will drive them forward.
As I said above, the merger with TriQuint has opened up a lot of opportunities for the company and the company should benefit from the synergies. Even after the recent rise, RF Micro Devices still has a forward P/E of 12.46, which is very cheap as compared to its peers. Moreover, recent speculations suggest that Apple may launch the iPhone 6 sooner than expected. Thus, investors shouldn't delay buying RF Micro Devices, especially since this version of iPhone has the potential of being the biggest ever.
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.