SAN FRANCISCO --
RF Micro Devices
sure looks ready for a crash. The stock has more than tripled since early October, leaving its price trading at 700 times trailing earnings. Since hitting a peak of 50 1/2 last Thursday, the stock has steadily slid back to 48 1/4.
But before placing bets, look closely. This sleeper of a chip company could still be in the early stages of growth. It has a lock on a process called heterojunction bipolar transistor, which can produce a gallium-arsenide-based power amplifier for cellular phones. The amplifier strengthens cellular phone signals from a single battery source. And that means smaller, lighter phones.
"The power amplifier is considered a very critical component in the phone," says Andrew Fuertes, a technology analyst with
Allied Business Intelligence
, a market research company. "The major problem with phones is battery size." Worldwide sales of power amplifiers will total an estimated $311 million this year, Fuertes says, a figure he forecasts will grow 26% a year for the next five years. And single-source amplifiers will grow faster than that, he says.
Until three months ago, RF Micro attracted little notice. When it went public in June 1997, it had been selling analog chips and power amplifiers mostly to
and losing money until the first quarter of 1997. The watershed came in January, when
signed on to incorporate RF Micro's power amplifiers in its new series of digital phones. Wall Street began to take interest six months later, when RF Micro Devices opened a new fabrication plant to handle the extra demand, and its revenue and profit in the September quarter tripled from the year before.
"They always had a very good product," says
semiconductor analyst Robert Tango, "but they couldn't support the level of demand." Tucker Anthony is not an underwriter of RF Micro.
It was great timing for the company, which signed on with Nokia just as the Finnish company became
brand for phone users. In the first nine months of 1998, Nokia's market share rose to 40% from 20% in the same period of 1997, according to
. And RF Micro grew with it, showing revenue of $31.4 million for the second quarter that ended Sept. 30, a 244% increase.
Until that point, it had been one of a pack of niche communication-chip makers, along with
. But none of these companies produces the single-source battery-power amplifiers that allowed RF Micro to win over Nokia. Even as RF Micro's revenue soared, Anadigics -- whose sales are tied to
-- declined as Ericsson's mobile-phone sales dropped. And Alpha, too, saw revenues drop along with those of its prime customer,
"We bought the stock over the last couple of months with an average price of 16," says Jeff Bernstein, co-manager of the
Northstar Special fund. He believes the stock price could double over the next couple of years. "We are holding on to it. We think they could announce contracts with Motorola or Ericsson in the first half of next year, and that will probably get people excited," he says.
Holders are also counting on overall growth of anything wireless -- from hand-held computers to remote-controlled devices. The semiconductor market is estimated to grow from $26.6 billion in sales in 1998 to $35 billion in 2001, a 31% increase.
Despite such optimism, there are reasons to be cautious, such as a pickup in the stock's insider sales. Since Oct. 9, insiders have filed to sell 87,729 shares at prices ranging from $20.13 to $25.34 a share.
And don't forget the short design cycles for cell-phone chips, which tend to last about 18 months. Chip makers can lose momentum when a rival design is chosen, and RF Micro's competitors are aggressively investing in R&D. "There is always an opportunity to lose your position," says
analyst Stanley Bruederle. "It's a very dynamic market."
Still, Bruederle says that for now, RF has a considerable lead. If it can maintain its recent growth, hang on to Nokia and diversify its customer base, its competitors will be hard-pressed to catch up. "No one else is even coming close," he says.