Things are looking up for chipmaker Skyworks Solutions (NASDAQ: SWKS ) in the second half of 2013. After being weighed down by negative news surrounding Apple's (NASDAQ: AAPL ) previous generation iPhone earlier this year, Skyworks is making a comeback of sorts. The company retained its position inside Apple's new iPhone 5s and 5c, and gave investors more reasons to cheer by posting strong fourth-quarter results recently.
Skyworks also issued a decent guidance, as it expects strong sales of analog chips that allow machines to connect to the Internet, driven by clients such as General Electric (NYSE: GE ) . In addition, management is anticipating robust demand from China as customers in the region upgrade to budget smartphones from 2G devices. In short, Skyworks is poised to benefit from different quarters. That's why, investors should hold on to it even though it's trading close to its 52-week high.
Apple to drive sales
Apple contractor Foxconn had accounted for almost 30% of Skyworks' revenue in fiscal 2012. Skyworks hasn't released its 10-K for fiscal 2013 yet, but it can be assumed that the company managed to increase its content (and revenue from Foxconn) this time around for a few simple reasons.
First, according to Canaccord Genuity analyst Michael Walkley, Skyworks and RF Micro Devices have probably won the main antenna switch spot in the latest iPhones from Peregrine Semiconductor. Next, Apple's new iPhones are seeing robust demand, which is probably the reason why Cupertino is tapping new manufacturing partners so that it can ramp up production.
According to AllThingsD, Apple has enlisted the services of Taiwanese contract manufacturer Wistron to boost its production capacity for the holiday period and the New Year. Same goes for the new iPad mini, for which Apple has turned to Compal Communications.
Apple has reportedly raised orders for the iPhone 5s and expects strong sales of the iPads in the holiday quarter. Now, since Skyworks has also been a longtime supplier of chips for Apple's tablets, it should continue to benefit from a bump in sales of iDevices.
Looking at China
According to Skyworks' management, 80% of cell phone users in China are currently on a 2G phone. The company expects such customers to upgrade to the latest technology going forward. Now, Skyworks has been in partnerships with the likes of Spreadtrum and MediaTek in the past. These chipmakers are in a great position in Chinese smartphones.
For example, MediaTek commands almost half of the Chinese smartphone business and recently unveiled an eight-core mobile processor. MediaTek is quite optimistic about the Chinese smartphone market. Management expects smartphone shipments to hit 450 million this year and grow to 500 million-600 million units next year. Hence, Skyworks should benefit from Chinese smartphone growth on the back of its partnerships with key chipmakers, along with smartphone makers such as Lenovo.
The Internet of Things
According to Cisco, there will be 50 billion connected devices by the end of the decade. Skyworks believes that it has the right products to benefit from this growth in connectivity. Skyworks is already making some moves to tap this growth. It recorded design wins in the health care industry in the previous quarter, and counts important players such as GE Medical, Boston Scientific, and Medtronic as partners.
The partnership with General Electric, in particular, could turn out to be quite fruitful. As Skyworks CEO David Aldrich pointed out, General Electric recently stated that it will integrate machine-to-machine communications across its entire industrial portfolio. This will include jet engines, locomotives, turbines, and medical devices, and represent millions of GE products.
General Electric is expanding the Internet of Things to industrial applications, calling it the "Industrial Internet." It recently launched 14 new products as a part of its Industrial Internet initiative, as it looks to make machines smarter. GE expects this initiative to boost GDP by $10 trillion-$15 trillion over the next couple of decades. Hence, Skyworks could stand to gain substantially from this initiative of GE.
In addition, Skyworks will also be supplying LED drivers to LG for automotive displays, apart from other applications such as remote lighting, in-home monitoring security platforms, etc.
At a forward P/E of around 9, Skyworks Solutions is very cheap. The company has zero debt and is looking well-placed to profit from growth in connectivity around the globe. So, despite having gained close to 30% this year and trading near 52-week highs, Skyworks Solutions still looks like a good buy.
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