Potential is a dangerous word in the investing world, and the proximate cause of many capital losses. Small RF semiconductor player TriQuint (Nasdaq:TQNT) has ample potential to grow, as nearly every device in our day to day lives outside of the toaster now carries wireless functionality. The key for TriQuint, though, is to diversify its customer base and actually execute on that potential - something that past history suggests may be difficult.

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An OK Quarter, But Devastating Guidance
Tech investors know that valuations and stock performance is more often about tomorrow than today; to that end, TriQuint's solid (or at least on-target) first quarter results was overshadowed by very disappointing guidance.

Revenue fell about 3% from last year and nearly 5% from the prior quarter, as a sizable decline (down 9%) in mobile and a modest decline in defense offset double-digit sequential growth in networking. Sales for second generation products dropped significantly, while Apple (Nasdaq:AAPL) (via manufacturer Foxconn Technology) made up more than one-third of sales.

Gross margin fell about half a point sequentially and nearly 10 points from the year-ago level, driven lower both by lower sales and unleveraged capacity additions undertaken in the meantime. This played a significant role in driving a year-ago and a quarter-ago profits into a loss this quarter.

Management's guidance for the second quarter is what really wrecked the story. With lower iPhone builds ahead of the fall launch of the new iPhone, management lowered revenue guidance by about 20% relative to the prior average estimate. With that decline in expected revenue, earnings per share estimates for both fiscal 2012 and fiscal 2013 have plunged as well, with the average estimate for 2013 down almost 50% in just a month.

SEE: Can Earnings Guidance Accurately Predict The Future?

Has Winning Apple Endangered the War?
Serving Apple is a decidedly mixed blessing. Serving the RF needs of Apple's products has helped push TriQuint's market share in the mid-teens, behind Skyworks (Nasdaq:SWKS) in the low 20's, but ahead of RF Micro Devices (Nasdaq:RFMD) and Avago (Nasdaq:AVGO).

This has come at a cost, though. It would seem that prioritizing Apple has hurt the company's standing with other phone companies like Samsung and HTC. Worse still, its focus on Apple didn't prevent it from losing the WiFi socket in the new iPad to Skyworks.

Now, very few companies are going to walk away from Apple business, so I'm not suggesting that TriQuint should be blamed for pursuing this business. But, as OmniVision (Nasdaq:OVTI) has shown so clearly, a small chip company that relies on Apple for a large amount of business can be in for a wild ride.

Can Investors Buy into the Future?
During its spring analyst day, TriQuint management highlighted some encouraging future growth developments. The company believes its total addressable market is moving towards $7 billion, as new products like tablets emerge and next-generation devices have increasing RF demands. Against that backdrop, the company is looking at a significant annual price erosion (around 8 to 12%) and a growing trend from companies like Broadcom (Nasdaq:BRCM) and Texas Instruments (Nasdaq:TXN) towards more and more chip integration.

Making matters worse, TriQuint's historical free cash flow production has been decidedly mediocre, with a decade-long average of negative 2% and a peak of 10% - well below the likes of Broadcom and TI. Now, it's perfectly fair to point out that much of that time excludes the benefit of Apple's business, but it's not as though recent results have been that all that good either.

SEE: Free Cash Flow Yield: The Best Fundamental Indicator

The Bottom Line
If TriQuint can maintain or grow its share as it targets more of that addressable market, and also improve its free cash flow conversion, these shares could well prove to be a bargain. Against that potential investors must also weigh the risk of losing Apple's business or not picking up significant incremental business from other large handset makers.

On balance, TriQuint looks pretty cheap, with only a few other names like Atmel (Nasdaq:ATML), ON Semiconductor (Nasdaq:ONNN) and Silicon Labs (Nasdaq:SLAB) in the same area in terms of undervaluation. Not surprisingly, all of those have their challenges as well. TriQuint is not a bad risk-reward story today, but I'd personally go with one of the other three today.

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

Tickers in this Article: TQNT, ATML, ONNN, AAPL

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