The Internet of Things and Smartphones Can Take This Chipmaker to New Highs

The Internet of Things is proving to be a boon for this chipmaker, while Apple and Samsung enhance its prospects further.

Jul 14, 2014 at 2:00PM

The Internet of Things is the next big trend in technology, and several companies are scampering to capitalize on it. Skyworks Solutions (NASDAQ:SWKS), known for supplying connectivity chips to Apple (NASDAQ:AAPL) and Samsung (NASDAQOTH:SSNLF), is one of them. Skyworks has made a number of impressive moves to optimize and develop chips that suit IoT applications, and its efforts are already reaping results.

Focus on IoT and innovations
Last month, Skyworks raised its revenue and earnings guidance for the third quarter (which it will report on July 17), citing an increase in its addressable market due to IoT applications. Now, the company expects to report year-over-year revenue growth of 31% and an earnings increase of 48%. CEO David Aldrich said, "Skyworks is capitalizing on the growing opportunity within the Internet of Things as well as increasing analog complexity associated with higher data rate connectivity standards, both of which are enabling us to substantially outpace the growth of the broader semiconductor market."

The company has invested aggressively in IoT initiatives, delivering highly differentiated, custom solutions that have allowed it to land design wins. As such, Skyworks expects to gain more business going forward, along with continued investments in research and development to shore up its IoT portfolio. 

The Panasonic venture
The company recently entered into a joint venture with Panasonic to work on enriching system capabilities, extending its technology portfolio, and enhancing financial performance. In fact, Skyworks' management expects the Panasonic deal to become immediately accretive to its gross margin and earnings. 

Together, Skyworks and Panasonic will work to develop high-performance filters. The chipmaker expects to benefit from 412 fundamental filter patents, plus patent applications held by Panasonic's filter division. These filters are used in electronic devices for signal processing, removing interference to enhance and deliver the required frequency, which is why they are gaining adoption in IoT. 

As there will be 50 billion connected devices by 2020, according to Cisco, the need for such filters will increase to remove interference in connectivity.

LTE is another catalyst
Skyworks recently introduced ultra-low noise amplifiers for use in applications ranging from cellular infrastructure, wireless connectivity, and broadcast communication applications. According to Skyworks, these new amplifiers provide "best-in-class noise figure as well as high gain and linearity, improving receiver sensitivity and dynamic range."

These new filters have been designed keeping the rate of growth in 4G LTE deployment across the globe. It is expected that the global LTE base station market will grow at a rate of almost 50% until 2016, according to TechNavio, indicating that Skyworks' addressable market is slated to grow at a robust pace.

The increase in demand for mobile data has created the need for efficient networking technologies that can deliver higher capacity at a lower cost. Skyworks is intent on unlocking this opportunity by way of product innovation.

The smartphone opportunity
Finally, the smartphone opportunity cannot be ignored, either. In the last fiscal year, Apple and Samsung probably accounted for around half of Skyworks' total revenue. This year, both companies have been on a roll, taking the smartphone war to the next level.

Samsung's Galaxy S5 sales have been encouraging, as the device has taken market share from Apple in several European markets. In countries such as the U.K., Germany, Spain, France, and Italy, 17% of Galaxy S5 buyers where erstwhile iPhone users, according to Kantar Worldpanel. 

Skyworks supplied a number of chips for the Galaxy S5, and it is already preparing to ramp up production for the Galaxy S6 later this year. On the other hand, Apple is looking to get back at Samsung with a bigger iPhone. It is rumored that Apple will, once again, launch two iPhones -- a 4.7-inch version and a 5.5-inch version. Moreover, analysts are already estimating that Apple will sell approximately 80 million iPhone 6 units this year. 

Skyworks had gained content in the previous iPhone, and with the production of the next-gen iPhone ramping up, Skyworks should put on a strong performance in the back half of the year.

The bottom line
Clearly, Skyworks is enjoying strong tailwinds. Both smartphones and The Internet of Things should continue driving the company's performance, helping it issue a solid outlook when it reports its third quarter.

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Harsh Chauhan 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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