Shares or Qorvo (QRVO) and Skyworks (SWKS) are higher in morning trading after a BofA Merrill Lynch analyst double upgraded both stocks, citing optimism about the Apple (AAPL) suppliers' 5G prospects.
DOUBLE UPGRADE: BofA Merrill Lynch analyst Vivek Arya double upgraded Skyworks and Qorvo to Buy from Underperform, also raising his price targets to $122 from $92 and $130 from $80, respectively. In a research note to investors, the analyst cited the unfolding opportunity of 5G technology, calling its adoption "one of the more compelling and investable themes in semis" that will drive an "exponential growth in components required to upgrade" the world's 1.4 billion 5G-compatible smartphones as well as "several hundred million" internet-of-things devices. Qorvo derives about 32% of its annual revenue and Skyworks about 51% from supplying Apple, Arya noted in his report.
Arya said he sees the companies' radio frequency chips as a "critical enabling technology" to monetize spectrum and boost the handset battery life, adding that these stocks have also lagged the semiconductor index SOX since 2015. While Huawei shipment restrictions are a risk, the analyst said he believes the companies can ship certain 5G parts to Huawei that are assembled overseas.
The BofA/Merrill analyst further stated that while the maturing iPhone product cycle and decline in global smartphone units drove consistent underperformance in RF stocks for the past few years, "the situation has changed" since the Q3 reports when 5G expectations led to improving expectations for the next few years.
OTHER POTENTIAL BENEFICIARIES: While Qorvo and Skyworks will definitely be winners in the 5G revolution, they won’t be the only tech companies to benefit from the shift, Arya said. He sees the first phase of 5G-related investments helping infrastructure-chip makers like Marvell (MRVL), Analog Devices (ADI) and Xilinx (XLNX), while the next phase of the 5G revolution "could also favor handset" companies with radio-frequency technologies.
PRICE ACTION: In morning trading, shares of Qorvo are up nearly 3% to $109.56, while shares of Skyworks are up 3.2% to $104.65.
Qorvo
+3.3 (+3.09%)
Skyworks
+2.59 (+2.55%)
Apple
-0.95 (-0.35%)
Marvell
-0.43 (-1.78%)
Analog Devices
-1.17 (-1.01%)
Xilinx
-0.07 (-0.08%)