Here's Why Skyworks Solutions Looks Like a Good Bet Near Multi-Year Highs

Despite appreciating strongly this year, there might be more upside in store for Skyworks.

Jun 27, 2014 at 4:02AM

Skyworks Solutions (NASDAQ:SWKS) is known for supplying chips to smartphone players such as Apple (NASDAQ:AAPL) and Samsung. The stock has done remarkably well this year with gains of around 70%, shooting to 14-year highs. The company has turned in consistent results for the past four quarters, and since it is positioned to profit from mobile devices and growth in connectivity, it could soar higher.

Benefiting from growth in connectivity
In the second quarter, Skyworks delivered a robust performance despite seasonality, and exceeded expectations across all key metrics. The company saw strong year-over-year revenue and earnings growth. Management expects the momentum to continue with an expanding market footprint and customer engagement. 

Skyworks sees opportunity as the world is becoming more interconnected. Growth in the cloud, data centers, wide area networks, and connected homes are expected to drive demand for its connectivity chips. Its custom analog solutions that facilitate connectivity across a wide range of communications protocol should see strong demand.

In addition, new product categories such as small cells and tablets, and entirely new verticals such as enterprise, medical, and automotive are opening up revenue streams for the company. These are creating the need for highly specialized systems, driving higher addressable content with the rising analog design complexity. Skyworks is capitalizing on these by leveraging its analog design expertise, expanding its product portfolio, and enhancing integration capabilities.  

Key trends driving the business
The company sees solid demand for its 4G solutions in the emerging markets, and in network infrastructure for new 802.11ac deployments with connected homes gaining traction. There are certain key trends which should help Skyworks sustain its solid momentum going forward. 

First, there's increasing demand for high-performance, high-data rate broadband services like 802.11ac and 4G LTE. These technologies are still in a nascent stage, accounting for just a few connected devices today. As these technologies pave the path for lucrative new revenue streams for carriers and ecosystem providers, they are being deployed aggressively.

Next, there's a tremendous demand within the emerging markets, as the number of LTE connected smartphones in Asia are expected to grow by more than 70% in the next two years, according to Credit Suisse

Also, connectivity is penetrating new vertical markets in new device categories. The total number of connected devices is estimated to reach a staggering 75 billion by 2020, according to a recent Morgan Stanley report. This is expected to dramatically expand Skyworks' addressable market. Finally, the company sees increasing dollar content in connected devices, driven by growth in products supporting multiple network standards such as 4G LTE, 802.11ac, and GPS.

Important customer wins
To make the most of such opportunities, Skyworks is offering its lead architecture with an entire suite of analog products. It expects to benefit from the rollout of these designs during the second half of the year. What's impressive is that Skyworks has already captured several new design wins across a number of diverse applications, including analog control ICs at Medtronic, a suite of five front-end devices for the Moto G smartphone, home-automation solutions with security sensors, motion detectors, lighting and meters. 

In addition, Skyworks has won a contract from EchoStar for switching Wi-Fi and GPS applications within a set-top box. In addition, it has grabbed another contract for Audi's HomeLink programmable system that complements the navigational assist design announced with Volkswagen last quarter. Finally, it announced a deal with SkyOne for manufacturing a full suite of Skyworks products. 

One of the biggest drivers for Skyworks' revenue this year could be Apple's iPhone 6. Skyworks has been supplying chips such as the main antenna switch and power amplifiers to Apple for a long time, and it is expected to do the same once again this time. The upcoming iPhone is expected to be produced in large numbers, with Apple contractors Foxconn and Pegatron expected to recruit over 100,000 people for the production ramp. 

Production is expected to begin in July, and since Apple is expected to manufacture around 80 million units of the iPhone 6, Skyworks should witness an increase in orders. Apple is expected to bring out a cutting-edge device this time, equipped with a bigger screen, and this could propel iPhone sales to record highs.

The bottom line
Skyworks' prospects look strong. The company is slated to profit from the secular growth in connectivity around the world, while having a client such as Apple allows it to benefit from smartphone growth. The stock might have surged to multi-year highs, but it still looks like a good long-term investment.

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Mukesh Baghel has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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