We think that Jabil (NYSE: JBL), a manufacturing services company that produces casings for Apple’s iconic iPhones and iPads, is a better bet compared to Qorvo (NASDAQ: QRVO), a semiconductor vendor best known for supplying radio frequency (RF) components to smartphone companies including Apple, despite its slower revenue growth and much lower margins. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth, operating margin growth, and valuation multiples. Our dashboard Jabil Circuit vs Qorvo: Sector Peers; Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.
1. Qorvo’s Revenue Growth Has Been Stronger, But Competition Is Mounting
Qorvo revenues grew at about 13% year-over-year over the most recent quarter, driven by growing demand for RF products from flagship handsets. Jabil grew revenue by just about 3%, on account of weaker sales at its electronics manufacturing services group which has been transitioning from a purchase and resale model to a consignment model, although this was offset by stronger sales in the diversified manufacturing services segment. Qorvo’s growth over the last few years has also been slightly better, with sales rising by about 10.5% each year over the last three years, compared to Jabil which grew sales by a slightly lower 9.8% each year. Over the last twelve months, Jabil’s sales stood at about $29.3 billion, while Qorvo’s sales stood at about $4.5 billion.
Looking forward, Qorvo projects that its full-year fiscal 2022 revenue will grow by about 15%, slowing down a bit versus the last year due to the ongoing supply chain challenges in the semiconductor industry and weaker demand, particularly from Asia. On the other hand, Jabil is likely to see sales grow by about 8% this year, per consensus estimates. Our Qorvo Revenue dashboard provides more insight.
2. Qorvo Has Thicker Margins And Margin Improvements Have Been Better
Qorvo’s margins remain considerably higher than Jabil’s. This makes sense, as Jabil is more focused on manufacturing services, while Qorvo is focused on higher-value semiconductor product development. Over the last twelve months, Qorvo’s operating margins stood at 27.6%, while they stood at around 3.6% for Jabil. Qorvo’s margins have also seen a much more consistent increase, rising from around 3% in 2018 to levels of almost 28% currently, as the company scaled up revenues. On the other side, Jabil, which operates on thin margins, has seen a bit more volatility, with operating margins declining from around 2.8% in 2019 to around 1.7% in 2020 and rising to about 3.6% in 2021. Looking ahead, both companies are looking at slightly higher margins in the near term, despite the ongoing supply chain issues, due to better cost management and a more favorable product mix.
The Net of It All
Now, Qorvo’s recent financial performance has been better than Jabil’s and its financial risk is also a bit lower with debt as % of the equity standing at about 0.03% vs 30.7% for JBL. While this partly justifies its higher multiple of 3.8x trailing revenue, versus 0.3x for Jabil, we still think Jabil is the better pick for a couple of reasons.
Qorvo’s growth over the long term could be hurt by higher competition in its bread and butter RF business. For example, mobile chipset behemoth Qualcomm said that its RF radio segment grew by about 45% year-over-year in the last quarter to $1.24 billion, implying that it is gaining some market share. Qualcomm will have a big edge over Qorvo as it can offer bundled solutions, combining its modem and app processors with RF chips. Jabil, on the other hand, has some advantages. Now, although Jabil’s business is inherently low margin, with the company relying on volumes to drive earnings, its large scale (100 facilities in 30 countries) and mass manufacturing know-how help it to lock in large customers. Besides Apple, Amazon is also now a large customer of Jabil’s. Moreover, the company is pushing into new areas including healthcare, where contract manufacturing is still underpenetrated. The markets also seem to be favoring Jabil over Qorvo in recent months despite Qorvo’s strong growth, with Qorvo stock down by about 2% year-to-date, compared to Jabil stock which is up by about 50%.
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