Apple (NASDAQ:AAPL) supplier TriQuint Semiconductor (TQNT) has surged this year to the tune of almost 60%. The company's proposed merger with RF Micro Devices (RFMD) and more dollar content at Apple has pushed up the company to new highs. However, is TriQuint still a buy after its solid surge this year? Let's find out.
TriQuint expects favorable trends in fiscal 2014, as it looks to benefit from key strategic initiatives implemented in the second half of 2013. TriQuint projects that its gross margin will grow approximately 500 basis points in 2014 on the back of increasing content in smartphones, strong base station demand, and cost reduction initiatives.
Improving product mix and demand
TriQuint is reaping the benefits due to an improved product mix and rising demand for premium LTE products in both the handset and the infrastructure markets. This shift in its product portfolio will enhance the company's profitability going forward. In addition to this, TriQuint sees strong underlying demand despite seasonality as consumers such as Samsung, Huawei, and ZTE ramp up smartphone production and deploy LTE in the Chinese market. The roll out of LTE infrastructure in China has led to strong demand for TriQuint's base-station products, and this could be a driving factor in the long run.
TriQuint should also see a significant increase in demand from its high value products such as discrete filters -- BAW and TC-SAW, MNPA and integrated PA duplex modules. The company is continuously investing in these products to support the growing demand for LTE devices across the globe. These high-value products had robust sales growth of 36% in the second half of fiscal 2013, primarily due to growing demand for premium filters and high performance broadband amplifiers.
LTE prospects are strong
TriQuint's prospects in the LTE market look strong. By 2015, there should be 300 million LTE connections, with the Asia Pacific region being the primary growth driver. In fact, China Mobile forecasts that in China alone, 200 million LTE handsets will be shipped this year. So, TriQuint is doing the right thing by investing in key product lines that would help it grow in this market.
TriQuint sees the premium filter market growing to approximately $2 billion by 2016. Therefore, it is looking to enhance its filter capacity and has ramped up its R&D team, apart from speeding up the development of filter-based products in integrated and discrete formats. TriQuint is also reducing its revenue from lower margin products, including commodity power amplifiers and transmit modules. Hence, TriQuint looks firmly on track to deliver solid earnings growth in the future.
TriQuint has also reduced its unused gas capacity, which allows it to cut down costs. It is transitioning the Texas gas scan line from 4 inches to 6 inches as this will produce a higher yield, and help TriQuint support its LTE infrastructure products in the defense market.
TriQuint launched 190 new products in fiscal 2013, hence establishing a strong strategic position in the RF (Radio Frequency) industry. On the global front, the company has observed healthy demand for its products in China. TriQuint recently launched a TV LTE and the company has received good response with respect to rate and volume. TriQuint is targeting the 400,000 base stations that are expected to be built in China in 2014 through its base station and optical products, and this could be an important growth driver going forward.
Apple as a catalyst
Apple is another big growth driver for TriQuint since it accounts for almost half of its top line. TriQuint supplies power amplifier chips to Apple for iDevices, so if Apple's addressable market grows and its innovative products find more adoption, TriQuint should benefit.
Apple is working toward new products such as a bigger iPhone with sapphire crystal display and an iWatch. Just recently, Apple Insider reported that Apple has applied a patent for oleophobic coatings. According to the website -
"In November, Apple signed a $578 million deal with sapphire producer GT Advanced Technologies to supply the super hard material for an as-yet-unseen product component. Many analysts and insiders speculate the partnership, which birthed a dedicated sapphire plant in Arizona, will inevitably lead to sapphire displays."
The iPhone 6 is expected to carry a sapphire display according to many websites, so Apple is looking to bring major innovations to its next device. While it is true that TriQuint won't be the one supplying sapphire displays to Apple, it should be kept in mind that an innovation such as sapphire display could bring more customers to Apple's stable, and benefit TriQuint indirectly.
Apple has recently patented a way cutting wafer-thin sapphire pieces using an industrial laser, so it is looking to make the iPhone even better. And if Apple deploys the iPhone with a larger screen, the device will gain more customers who have been using bigger Android phones and stayed away from Apple due to the smaller screen size of the iPhone.
Hence, all these developments bode very well for TriQuint.
Benefiting from the RF Micro merger
TriQuint should also benefit from its proposed merger with RF Micro. The merger should help TriQuint and RF Micro capture more market share and tap new growth opportunities in mobile devices, network infrastructure, and the aerospace/defense market.
RF Micro and TriQuint will together present the industry with a diversified and broad portfolio of crucial empowering technologies to advance and commercialize conservative integrated solutions in a faster manner. Moreover, the cost synergies that are expected as a result of this merger will play a big role in driving earnings growth in the future. Both companies expect cost synergies to the tune of $150 million.
Despite solid gains this year, TriQuint remains in a good position to grow its business in the future. Hence, investors should remain invested in this chip stock as it can deliver further upside in the future.
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.