3 Reasons to Sell QRVO and 1 Stock to Buy Instead

Qorvo has had an impressive run over the past six months as its shares have beaten the S&P 500 by 15.9%. The stock now trades at $88, marking a 22.8% gain. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is now the time to buy Qorvo, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Do We Think Qorvo Will Underperform?

We’re happy investors have made money, but we don't have much confidence in Qorvo. Here are three reasons why you should be careful with QRVO and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, Qorvo’s 2.8% annualized revenue growth over the last five years was sluggish. This fell short of our benchmarks. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

2. Shrinking Operating Margin

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.

Analyzing the trend in its profitability, Qorvo’s operating margin decreased by 20 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Qorvo’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was 2.6%.

3. Free Cash Flow Margin Dropping

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

As you can see below, Qorvo’s margin dropped by 14.7 percentage points over the last five years. Continued declines could signal it is in the middle of an investment cycle. Qorvo’s free cash flow margin for the trailing 12 months was 13%.

Final Judgment

Qorvo falls short of our quality standards. With its shares outperforming the market lately, the stock trades at 15.8× forward P/E (or $88 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better opportunities elsewhere. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.

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