3 Reasons Why Skyworks Solutions Can Still Deliver More Upside

Skyworks has appreciated 90% this year, and there's still room for it to deliver more upside.

Jul 24, 2014 at 3:00PM

Apple (NASDAQ:AAPL) supplier Skyworks Solutions (NASDAQ:SWKS) is on a roll this year. The stock has soared to multi-year highs with 90% gains in 2014 thus far. Given the pace at which the company's revenue and earnings are increasing, it's difficult to imagine that its strong run will stop anytime soon.

Skyworks delivered robust financial results in the third quarter, exceeding its upwardly revised guidance. Its revenue jumped 35% year over year, and non-GAAP earnings per share came in at $0.83, compared to $0.54 last year. The company is seeing broad-based strength in demand across various markets. Skyworks' diversification and execution has allowed it to profit from different connectivity applications, and the momentum looks set to continue.

The expanding opportunity
Skyworks' business is benefiting from an increase in the global adoption of connectivity across a wide range of end markets. Demand is being driven by billions of unconnected users having first-time Internet access in emerging economies. Looking ahead, the increasing popularity of streaming music services, on-demand media, cloud services, mobile e-commerce, and the growth of the Internet of Things will continue driving Skyworks' performance. 

Skyworks believes that it is well positioned to capitalize on these opportunities due to its broad portfolio of specialized technologies, advanced system integration capabilities, and operational efficiency. The company is focused on delivering differentiated, customized solutions through these core competencies. The chipmaker sees content gains, new market penetration, and share consolidation driving its performance. Skyworks is currently working on building platforms for deployment in 2015 and 2016. 

The company sees three main drivers in the mobile market. First, there's an increasing number of operating frequencies, which is driving improved service coverage and higher data rates. Also, the band content is increasing across high-end, mid-tier, and entry-level 4G LTE devices, which is driving more addressable content.

Second, there's rising system complexity. Band proliferation, combined with the adoption of new techniques, including advanced antenna architectures, carrier aggregation, and tuning and filtering, has resulted in a shift away from discrete components toward more customized and integrated solutions. Skyworks is of the opinion that it has a strong product portfolio to address this transition. 

Third, Skyworks' addressable content is growing as OEMs look for new ways to improve signal quality and download speeds in order to support access to on-demand content, streaming media, and cloud-based services. These are leading to more complex downlink architectures, and creating new growth areas for Skyworks. Additionally, the company is expanding its portfolio of mobile analog products in avenues such as power management, backlighting, and GPS, and is witnessing rising customer traction. 

iPhone 6 production to drive growth
The company is well placed to profit from mobile devices, too, due to its relationship with Apple. Skyworks has been a longtime supplier of the main antenna switches and power amplifiers for the iPhone, and its terrific outlook indicates that it has won the job once again. In the current quarter, Skyworks expects revenue to rise 43% year over year, which is better than the previous quarter's growth.

Apple is preparing for a record production ramp of the iPhone this year. The company expects that its larger-screen phones will drive unprecedented demand, therefore it's asked suppliers to produce around 70 million-80 million iPhones, as per CNET. Such an ambitious production target easily eclipses Apple's production of 50 million-60 million units of the iPhone 5s and 5c last year, according to CNET. 

Hence, Skyworks' addressable market is on track to expand because of a bigger iPhone. 

Beyond mobile
There are a number of positive trends outside of the mobile segment as well. For example, there's a huge data capacity requirement. Skyworks' digital content is increasing rapidly with next-generation connectivity standards such as 802.11ac, coupled with multiple transmit and receive channels, which is driving greater performance levels in both routers and set-top boxes.

Moreover, connectivity is increasing due to new device categories, such as wearable electronics and fitness applications, and new opportunities in connected homes, such as lighting, security, and automation. Management expects that these will provide new incremental growth avenues for Skyworks.

Skyworks' products are being adopted at a solid pace in the market. The company is enabling Sonos high-fidelity wireless audio streaming music platforms. It has landed design wins at Harris Corporation for joint tactical radios. The company has captured analog control IC content with Xiaomi for smart TVs and set-top boxes. Skyworks is also powering Novero's on-board, in-vehicle communication systems.

The bottom line
Skyworks should benefit from secular growth in connectivity, and having high-volume smartphone clients such as Apple will also help. So, even after its terrific appreciation this year, Skyworks looks like a stock worth holding as it has the potential to deliver more upside.

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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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