Citi: Buy Skyworks Over Qorvo

Radio Frequency (RF) stocks have pulled back "sharply" since peaking in June due to concerns of slowing smartphone growth, especially in China. In a report published Thursday, Atif Malik of Citi commented that valuation of RF stocks looks "attractive" even when factoring in his expected an 11 percent mobile compounded annual growth rate versus the Street's 15 percent expectations. "Based on our view that mobile RF growth is mature or in the 5-6th innings, broad market exposure is necessary to overcome decelerating smartphone demand and Chinese exposure risk," Malik wrote. "We believe that Skyworks which has higher exposure to the Internet of Things (IoT) market, will have a long-term growth advantage to Qorvo."

Malik initiated coverage of Skyworks with a Buy rating and $115 price target. According to Malik, Skyworks' "outsized" semi revenue growth on IoT diversification (20 percent or more compounded annual growth rate) and its higher free cash flow generation/return to shareholders will result in multiple expansion over the next three years. Malik is expecting Skyworks' overall sales to grow at a 15 percent compounded annual growth rate over the coming years despite his expectations for an 11 percent compounded annual growth rate in the overall mobile RF market. Finally, the company's "balanced" mobile exposure at Apple, Samsung, and China should "shield" it from fluctuations and uncertainty with macro concerns surrounding China.

Malik initiated coverage of Qorvo with a Neutral rating and $49 price target. Qorvo's China exposure (40 percent of sales in the last reported quarter) poses risks to the Street's December and March quarter sales and earnings per share estimate, according to Malik. The analyst noted that the company will see tailwinds over this time period given the ongoing economic growth issues in China. Malik also suggested that investors wait for the declining smartphone market in China to "bottom" before "turning more constructive" on the stock.