【el arroyo new braunfels】Could This Chipmaker Be the Next Xilinx?
Xilinx
(NASDAQ: XLNX)
has captured Wall Street's imagination over the past year or so thanks to
its terrific rise
in spite of the broader semiconductor industry weakness. Theel arroyo new braunfels chipmaker has benefited from its strategy of going after fast-growing niches such as artificial intelligence chips used in data centers and fifth-generation wireless technology infrastructure.
Unsurprisingly, Xilinx shares continued their impressive run after it reported
a blowout third quarter
. However, the same cannot be said about
Apple
supplier
Qorvo
(NASDAQ: QRVO)
, whose stock price sank after its guidance for the fourth quarter of fiscal 2019 fell behind expectations. That's not surprising as Qorvo reportedly relies on Apple for just over a third of its revenue and Apple has seen iPhone weakness.
But a closer look at Qorvo's guidance and the outlook for the long run suggests that it won't be long before it gets back on track and starts delivering growth.
A hand drawing an upward-sloping arrow.
Image Source: Getty Images.
A Xilinx-like catalyst
Xilinx is benefiting big time from early
5G
wireless deployments in South Korea, China, and North Korea. Its communications revenue shot up 41% annually last quarter, outpacing the company's overall revenue growth of 34%. Qorvo's latest quarterly report indicates that it is enjoying a similar boost from 5G deployments.
In fact, the company's infrastructure and defense products (IDP) revenue grew in the double digits annually for the
11th straight quarter
to a record $230 million in the third quarter. According to Qorvo CFO Mark Murphy, "strong growth in infrastructure as carriers pick up the pace of their 5G investments" was one of the key drivers behind the 14% year-over-year jump in this segment.
The chipmaker is looking at current-quarter earnings of $1.05 per share on revenue of $670 million. That's not bad considering that it generated $665 million in revenue in the prior-year period and earnings of $1.07 per share.
What's more, the 5G catalyst seems to be strong enough to help Qorvo mitigate the mobile weakness caused by Apple as the nearly flat top-line forecast for the current quarter suggests.
However, investors shouldn't forget that Qorvo still relies on its mobile segment for around 73% of revenue. In the most recent quarter, revenue from this segment was down 6% annually on account of weak sales of flagship smartphones, especially in China.
Is a mobile turnaround in the cards?
The fact that Qorvo's mobile revenue dropped in the mid-single digits is a testimony to the fact that it has a diversified client base that allowed it to weather the 15% drop in iPhone revenue that Apple saw in the quarter that ended in late December. However, Apple might continue weighing on Qorvo's performance in the near term.
Story continues
As such, Qorvo's mobile business is expected to remain under pressure given its dependence on Apple. But 5G devices could revitalize the smartphone market, with
Gartner
predicting that sales of 5G smartphones will hit 65 million units in 2020, while a forecast by Strategy Analytics predicts 1.5 billion in annual shipments by 2025.
Networking giant
Ericsson
believes that at least eight 5G smartphone models could hit the market by mid-2019. So it won't be surprising to see Qorvo's mobile business turn around sooner rather than later thanks to an increase in demand for its 5G smartphone modules.
In all, 5G could fire up Qorvo's mobile and infrastructure businesses and pull it out of mediocrity, just like it did for Xilinx.
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Harsh Chauhan
has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Gartner. The Motley Fool has a
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- ·5%, led by a 17% increase in average ticket and a slight decline in traffic. Growth in the quarter reflected the impact of households stocking up on essentials like paper goods and cleaning supplies as the pandemic became a nationwide concern, along with strength in discretionary categories as the quarter came to a close and stimulus dollars and tax refunds were disbursed.
As shown below, the results in the quarter materially changed the trend in two-year stacked comps for each of the banners, along with a significant acceleration for consolidated comps.
The increase in consolidated comps was the primary driver of an 8% increase in revenues to $6.3 billion. The company ended the quarter with 15,370 locations, up less than 1% year-over-year. This reflects a 7% increase in Dollar Tree units, offset by a 4% decline in Family Dollar units.
The top-line results at each banner flowed through to their respective income statements, with Dollar Tree gross margins and operating margins declining year-over-year while Family Dollar gross margins and operating margins expanded year-over-year. On a consolidated basis, gross margins contracted by 120 basis points in the quarter to 28.5%, reflective of a shift to lower-margin consumables, tariff costs and the impact of markdowns from the Easter headwinds at the Dollar Tree banner. The company saw slight operating leverage on SG&A from higher comps, with the net result being an 80 basis point contraction in operating margins to 5.8%, with operating income declining 5% to $366 million. This is not adjusted for $73 million of pandemic-related costs, such as PPE supplies.
In the first quarter, the company opened 85 stores (net of closures) and completed 220 Family Dollar renovations to the H2 format. Importantly, comps at renovated Family Dollar stores continue to outpace the chain average by more than 10%. On the call, management indicated that they plan on reducing both the number of new store openings (from 550 to 500) and the number of H2 renovations (from 1,250 to 750) in 2020.
Personally, given the fact that Family Dollar is seeing material benefits to its business from the pandemic with new or lapsed customers coming into its stores, I think the company should try to get more aggressive with its renovation plans, not less. On the other hand, you could argue that renovations cause short-term disruptions and limit their ability to fully capitalize on the business momentum they are currently experiencing.
As a result of fewer new stores and remodels, management now expects 2020 capital expenditures to total $1.0 billion compared to previous guidance of $1.2 billion. In addition, the company has temporarily suspended share repurchases. At quarter's end, the company had $1.8 billion in cash on its balance sheet compared to $4.3 billion in total debt.
Conclusion
In recent years, Dollar Tree has been a tale of two cities. While its namesake banner has generally delivered impressive financial results, Family Dollar has been a persistent underperformer. This quarter, those results flipped, and given what we've seen in the weeks since quarter's end, there's a decent possibility that we will see something similar in the coming months. As the CEO noted, the second quarter is off to a very good start at Family Dollar.
Here's the important question: how useful is that information is in terms of making future predictions about the business? Will recent success at Family Dollar translate into long-term success for the banner? The optimistic take is that new or lapsed customers, especially those visiting the renovated stores, could become recurring business for the banner. The pessimistic take is that they have experienced short-term success out of necessity as people went to any store that was open to try and find essentials like toilet paper and hand sanitizer that were largely out of stock throughout the retail landscape. From that view, many of these customers could abandon the retailer when life returns to normal. As Philbin noted on the conference call, early on [during the pandemic], folks needed us. Will people still shop as much at Family Dollar when it's no longer a necessity?
Personally, I do not place too much weight on the recent results. I will need to see incremental data points that indicate that Family Dollar has truly won sustained business from these new customers. While I still believe that the Dollar Tree banner is a well-positioned retailer with attractive unit returns, I'm not yet willing to say the same thing for Family Dollar. For that reason, along with the recent run-up in the stock price, I plan on staying on the sidelines for now.
Disclosure: None
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