TriQuint Semiconductor (TQNT) is a leader in RF solutions for mobile phones. The company has consistently grown its revenue in the past 5 years. Revenue has gone up from $400 million in 2006 to $900 million today. Fiscal year 2010 revenue jumped 34% from the previous year. Analysts expect the company’s growth to be 11% YOY for the next 5 years (TQNT’s management is targeting 20% YOY growth). Looking at the company’s balance sheet, it has close to $1 billion in current assets with book value going up from little over $3 in 2006 to $5.2 today. The company has little or no debt, is making money and has decent cash position ($180 million).
The company is trading at a remarkable P/E of 5.1 and a forward P/E of 9. Its P/B is 1.0, P/S is 1.0 and P/CF is 7.3. When compared to the Industry, TQNT is an undervalued stock. The smartphone market is so hot and new electronic gadgets are coming out every day. Every RF player can survive in this space as long as they can tap on new opportunities.
So what's wrong with the stock?
The stock is a “screaming buy” based on current numbers but lack of confidence in company/management scares people away from this stock. Following are a few reasons hurting the stock price and my explanation:
- Management performance - The number one reason is the management's inability to provide a proper guidance. TQNT management has missed the mark last few quarters. Though the current quarter revision is justifiable, the management's past missteps have hurt the stock price.
- Slowing business - With US expected to cut down on Defense and Aerospace spending, a certain percentage of the crowd believe it could hurt TQNT's future revenue. About 10-15% of revenue comes from D&A and there is no significant growth expectation from this line of business, this risk is less significant compared to losing out to competitors in the mobile space.
- Ability to meet demand - In the recent past TQNT has declined customer’s orders because of lack of capacity. The management spent significantly to increase capacity which hurt the free cash flow. I believe the company should be able to meet the demand going forward and should be present in future iphones.
- Competition - Skyworks is not slowing down anytime soon. RF Micro and Avago are stepping up and slowly gaining market share. If TQNT fails to tap on future growth opportunities, it might lose out to competitors.
- Uncertain economy - Economy overall is not looking good but even in this uncertain economy, smartphone and tablet business continues to grow. Any impact due to the economy should be short-term and TQNT's long-term potential should remain intact.
I do believe in TQNT's growth story and the stock looks fairly valued ($5.6 at the time of this writing). It has 60-75% upside potential from the current price in the next 2 to 3 quarters. I believe management's performance will have significant influence on stock price compared to economy and competitors. Management’s ability to provide proper guidance (promise less, deliver more), carry out strategy and planning for organic growth going forward will weigh more on future stock price. The first test will come on October 26th when the company will provide 4th quarter guidance.
Disclosure: I am long TQNT.