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Better Buy: Infinera Corporation vs. Skyworks Solutions

By Leo Sun - Apr 30, 2017 at 3:06PM

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Which connectivity player is the better long-term play at current prices?

Infinera (INFN 0.00%) and Skyworks Solutions (SWKS 3.99%) both provide hardware that connects devices across vast networks. Infinera provides fiber optic systems for telecom companies, while Skyworks supplies radio frequency (RF) chips for a wide range of industries.

It's widely believed that the number of connected devices will surge over the next few years. Cisco estimates the figure will double from 25 billion to 50 billion between 2015 and 2020, potentially boosting the revenues of connectivity players like Infinera and Skyworks.

A graphical depiction of a connected city.

Image source: Getty Images.

But over the past 12 months, Infinera shares have tumbled more than 30%, as Skyworks shares have soared more than 40%. Let's examine both companies to see why the former floundered and the latter flourished -- and whether or not those trajectories will continue throughout the rest of the year.

What do Infinera and Skyworks Solutions sell?

Infinera mainly provides Long Haul Wave Division Multiplexing (WDM) optical transmission systems to service providers. These systems allow telcos to boost their network capacity over long distances without laying down additional fiber or overhauling their networks.

Infinera's proprietary PIC (photonic integrated circuit) manufacturing process gives it a cost advantage against most of its direct competitors in the Long Haul WDM space. The company also recently diversified into the metro WDM and DCI (data center interconnect) markets, which cover shorter distances. Like many other fiber players, Infinera is highly dependent on telco upgrades in China to boost its top line growth.

A picture of a woman in front of the Skyworks logo.

Image source: Skyworks.

Skyworks' RF chips are used across the mobile, automotive, broadband, wireless infrastructure, home automation, industrial, and military markets for M2M (machine to machine) communications. However, Skyworks is primarily known as an Apple supplier.

Skyworks doesn't disclose exactly how much of its revenue comes from Apple, but earlier estimates by Oppenheimer & Co. claimed that 40% of its top line came from chips for iDevices. Skyworks believes that its dependence on Apple and other smartphone makers will wane over the next few years as sales of RF chips for Internet of Things (IoT) products like connected cars, smart home appliances, and wearables rise.

How fast are Infinera and Skyworks growing?

Infinera's revenue has fallen annually for two consecutive quarters. Its revenue fell 31% annually last quarter, and Wall Street expects it to finish the year with an 8% decline. Infinera blamed that softness on a "historical overexposure" to the long haul WDM market, which many service providers shunned in favor of upgrading connections over shorter distances (with metro WDM and DCI systems).

However, cyclical demand for long haul WDM will likely improve, and Infinera's newer metro WDM and DCI businesses are still expected to grow. That's why Infinera's revenue is expected to rebound 16% next year. Wall Street expects Infinera to post a non-GAAP loss this year, but it's expected to return to profitability next year.

Skyworks' revenue rose 10% annually on robust iPhone sales last quarter, reversing three straight quarters of year-over-year declines. Analysts expect Skyworks' revenue to rise 9% this year and 10% next year.

On the bottom line, Skyworks is expected to grow its non-GAAP earnings by 12% this year and 14% next year. A $500 million buyback, which was authorized in the first quarter, also indicates that management is confident that the stock still has room to run. Those numbers look solid, but investors should be mindful of Skyworks' exposure to Apple -- if the upcoming iPhone 8 disappoints consumers, the stock could give up its gains very quickly.

Dividends and valuations

Infinera has never paid out a dividend, and its wobbly earnings growth indicates that it won't likely announce one anytime soon. Skyworks pays a forward dividend yield of 1.1%, which is supported by a low payout ratio of 23%. The company has consistently hiked that dividend every year since introducing it in 2014.

Infinera's P/E remains negative due to its lack of profitability, but its price-to-sales ratio of 1.9 is slightly lower than its industry average of 2.2. Skyworks trades at 22 times earnings, which is lower than its industry average of 28, but its P/S ratio of 6 is much higher than the industry average of 3.9. However, the bulls might argue that premium is easily justified by its high exposure to Apple's growth.

The winner: Skyworks Solutions

Infinera underperformed many of its peers in the fiber optic industry because it relied too heavily on Long Haul WDM over shorter-range technologies. That cyclical market might eventually turn in its favor, but fiber optic component plays like Oclaro and shorter-range players like Acacia Communications are probably better fiber optic plays for now.

I personally don't like Skyworks' heavy dependence on Apple, but it's still one of the best iPhone supply chain plays on the market today. Moreover, its stable top and bottom line growth, reasonable valuations, and room for dividend growth make it a smarter buy than Infinera at current prices.

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Stocks Mentioned

Skyworks Solutions, Inc. Stock Quote
Skyworks Solutions, Inc.
$98.03 (3.99%) $3.76
Infinera Corporation Stock Quote
Infinera Corporation
$5.30 (0.00%) $0.00
Apple Inc. Stock Quote
Apple Inc.
$141.66 (2.45%) $3.39
Cisco Systems, Inc. Stock Quote
Cisco Systems, Inc.
$44.10 (2.73%) $1.17

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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