Buy TriQuint Semiconductor

As previously mentioned, we expect smart phones, and iPhones specifically, to continue to drive the new technology secular growth cycle over the next five to seven years. Smart phones will drive new technology adoption and change user behavior around technology. Therefore, those companies that supply into smart phones are particularly interesting in this cycle.

A relatively less well-known company, TriQuint Semiconductor ( TQNT - news - people ), is a supplier to Apple's ( AAPL - news - people ) iPhone. It makes Radio Frequency semiconductors for three markets: handsets, networks and military. The percentage of revenues earned in the handset market has been increasing sequentially, from 48% of revenues five quarters ago to 65% this past quarter, driven by the growth in smart phones and 3G.

TriQuint supplies to all the major smart-phone makers (including Apple, Research in Motion ( RIMM - news - people ) and HTC) with the exception of Nokia ( NOK - news - people ). Not supplying to Nokia isn't a huge concern as Nokia's overall smart phone market position continues to deteriorate thanks to TriQuint's other customers. And TriQuint could yet win Nokia as a customer. TriQuint's handset revenue increased 56% from the first quarter and 77% from the quarter a year ago. Just to reiterate: TriQuint's handset revenues increased 77% from a year ago during a terrible financial crisis such that most companies in most sectors reported negative comparisons to the period a year prior.

TriQuint's stock has several areas of momentum currently, in my opinion. First, TriQuint had a very difficult March quarter due to excess inventory in the channels, which appear to have been worked off through this past quarter. That bodes well for demand for TriQuint's products into the end of the year as smart phones continue to ramp into the seasonally strong second half of the year. TriQuint's bookings increased as well quarter over quarter to 1.22 times billings in the June quarter.

As demand increases, TriQuint's capacity utilization in their fabs should continue to increase from a very tough 35% in the March quarter to 66% in this past June quarter and perhaps greater going forward. Capacity utilization was 83% last year in the September quarter. Increased capacity utilization translates directly into increased gross margins for the company. The management has a long-term objective for 40% gross margin vs. 32% last quarter, and the goal becomes increasingly within reach as revenues increase.

Second, in the past several earnings conference calls, management has discussed cost-cutting measures undertaken at the company, and its focus on cost containment. In stark comparison, cost cutting was not mentioned in the prepared comments of this past quarter, as management was focused on growth in the handset and military businesses and stabilization in the networks business. This is a subtle indication that management feels better about visibility; 89% of next quarter's guidance is already booked.

Finally, the company has a relatively small market capitalization ($975 million) with less research coverage than its competitors, which means that its investment opportunity is less broadly known. Current consensus earnings have the company more than doubling earnings from 2009 to 2010, from $0.23 to $0.49, and even these may prove conservative with the growth in smart phones. Case in point: Smart phones drive data use, which require increased radio frequency content from $0.90 to $1.50 per handset to $6.00-$8.00 per smart phone. Yet, even at the consensus estimates, TriQuint is currently trading at 13.2 times forward earnings based on Friday's close of $6.49, less than most other semiconductor suppliers into smart phones, and gives investors 113% growth in earnings.

The stock has experienced tremendous gains already this year (although less than its competitors), up from around $2.00 in January and in March and, accordingly, has also experienced some pullback from recent highs of $7.18 on July 31. If the company continues to execute upon the smart phone opportunity and in line with management targets, the company has the potential to earn better than consensus earnings in 2010, with earnings potential of $0.55, or earnings growth of 139%. By applying an earnings multiple of 16.3x, the stock could easily retrace and exceed previous highs to $9.00, a nice return from current levels. Investors may want to take a look at TriQuint given the attractive price for earnings growth. And, if interested, investors should take advantage of the volatility in the stock to invest on down days.