Why Skyworks Solutions Could Head Even Higher

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Shares of Skyworks Solutions (Nasdaq: SWKS  ) hit a 52-week high on Thursday. Let's take a look at how it got there and see if clear skies are still in the forecast.

How it got here
As goes the smartphone and tablet market, so will go the fortunes of Skyworks Solutions, a provider of radio-frequency solution chips.

The most immediate boost on the horizon for Skyworks is the impending release of the iPhone 5 from Apple (Nasdaq: AAPL  ) which has been all but confirmed by the Fool's Apple-savvy analyst, Evan Niu. The iPhone 4S marked the perpetuation of a pattern that has it splitting RF solution duties with TriQuint Semiconductor (Nasdaq: TQNT  ) , and it's very unlikely that we'll see any differentiation in that pattern with the introduction of the iPhone 5.

Where Skyworks really got a leg up on the competition was in the release of the iPhone onto the Verizon network. That particular iPhone model featured two notable gains for Skyworks, with TriQuint being left out of the mix.

Skyworks is also benefiting from the robust guidance of other Apple component suppliers. Cirrus Logic (Nasdaq: CRUS  ) , which relies on Apple for 70% of its sales and is the best pure-play way to get an inside look at Apple's next-generation iPhone sales projections, forecast sequential revenue growth of 70%-90% in the upcoming quarter.

The biggest threat to Skyworks -- and any Apple-component maker, for that matter -- has to do with the always-evolving tech cycle. Usually months before the release of a new smartphone or tablet, consumers will hold off on their purchases in order to wait for the next-gen item. This wait-and-see approach can be a detriment to the bottom line of these tech companies.

How it stacks up
Let's see how Skyworks Solutions compares to its peers.

SWKS Chart

SWKS data by YCharts.

This is as cut-and-dried as it gets! You can clearly see the separation between Skyworks and TriQuint last year when Skyworks won the additional bands in the Verizon iPhone, and you can see how poorly RF Micro Devices (Nasdaq: RFMD  ) has fared due to its reliance on Nokia.

Company

Price/Book

Price/Cash Flow

Forward P/E

Projected 5-Year Growth Rate

Skyworks Solutions 3.5 17.8 15.9 15.1%
TriQuint Semiconductor 1.1 10.8 29.5 5.0%
RF Micro Devices 1.7 9.4 19.5 11%

Sources: Morningstar and Yahoo! Finance.

Again, it's pretty night-and-day to see why Skyworks is outperforming its peers. In terms of forecast growth rates, Skyworks is handily expected to beat RF Micro Devices, and could grow at three times the rate of TriQuint (a very feasible possibility if it keeps taking contracts from TriQuint).

In terms of valuation, TriQuint and RF Micro Devices offer more from a book value perspective, but Skyworks' rapid bottom-line growth rate more than makes up for what it lacks in book value. For TriQuint or RF Micro to become more attractive investments, they'll need big contract wins. For RF Micro, that means distancing itself from Nokia, and for TriQuint, that means going toe-to-toe with Skyworks and beating it to additional contracts.

What's next
Now for the $64,000 question: What's next for Skyworks Solutions? The answer will depend on the success of Skyworks in holding onto and expanding on its existing contracts and in how innovative it is with developing new products.

Our very own CAPS community gives the company a four-star rating (out of five), with 94.8% of members expecting to outperform. Although I've yet to make a CAPScall on Skyworks in either direction, I'm ready, even at a new 52-week high, to enter a CAPScall of outperform.

Skyworks is the premier RF solutions provider, period. It proved that when it booted TriQuint from the Verizon iPhone and its innovation should keep it at the forefront. Skyworks has plenty of other factors on its side. First, it's really expensive and time-consuming for Apple to switch vendors, so a change in RF suppliers is unlikely. Second, TriQuint really doesn't have the production capacity to compete against Skyworks. Finally, smartphones and tablets are becoming cheaper, which is going to make it more affordable for the average consumer to buy one. More units sold will equal more RF chips sold for Skyworks.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Cirrus Logic, Apple, and TriQuint Semiconductor. Motley Fool newsletter services have recommended buying shares of and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On September 08, 2012, at 3:34 PM, bike5389 wrote:

    If I recall at the time of the Verizon release Triquint had a capacity situation. Listen to all the CC from that period. Since that time Triquint has increased capacity by 40%.

    I have no reason to think TQNT was left out for any other reason.

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