Skyworks Solutions (NASDAQ:SWKS) is showing no signs of stopping as its latest results blew past expectations, thanks to the growing adoption of its chips by Chinese smartphone customers. Primarily known as a supplier of radio frequency chips for Apple's iPhones, Skyworks has been working hard to wean itself away from Cupertino by winning more business in China, which is a smart move considering the explosive sales of Chinese smartphones.
Skyworks is also witnessing strong design win activity in the automotive space, which could help it tap into a multibillion-dollar chip opportunity. I see both as crucial to the company's long-term growth. Here's why.
Skyworks is reducing its Apple dependency
Since Skyworks is a key supplier for the Apple iPhone, it is exposed to Apple's device production cycles and supply chain actions. The iPhone supply chain has been rattled in recent weeks as the smartphone giant has decided that it no longer needs the technology from two of its suppliers, who were highly dependent on Apple for a lot of revenue.
Therefore, Skyworks has been gradually trying to reduce its reliance on Apple by winning business from other smartphone makers. As it turns out, its largest client -- Apple -- contributed less than 40% to its total revenue in the second quarter as compared to 44% in fiscal year 2015.
Skyworks has engineered its shift by riding the coattails of Chinese smartphone player Huawei, which accounted for over 10% of its revenue last quarter. In fact, Huawei used a number of Skyworks' products in its latest P10 flagship phone, including antenna tuners and the SkyOne suite of front-end LTE solutions that it had specifically launched for the Chinese market.
Skyworks management believes that its dollar content (the dollar value of chips placed inside each smartphone) in Huawei smartphones is getting close to $8 to $10 per unit, thanks to the addition of more technology from the chipmaker. This should give it a nice boost going forward as Huawei's smartphone sales are booming.
In 2016, the Chinese company's smartphone shipments grew 29% as it captured overseas markets and maintained its dominance in the domestic market. The trend has continued this year as Huawei's global smartphone sales during the first quarter jumped almost 22% to 34 million units, according to IDC.
Not surprisingly, Skyworks believes that its Huawei account will gain more traction in the second half of the year. Meanwhile, Apple's iPhone sales during the first quarter stagnated from the prior-year period and its market share fell, but Skyworks' strategy of landing more content at fast-growing Huawei should act as a cushion.
The automotive business is gathering momentum
Skyworks Solutions landed design wins at three automakers last quarter for supplying its LTE modules, connectivity chips, and GPS solutions. The semiconductor specialist didn't get into deeper details regarding these design wins and nor does it spell out how much revenue it gets from this segment, but it is clear that its automotive connectivity solutions are now gaining popularity.
Until last year, Skyworks had just one big automotive account to show in the form of LG Electronics, which decided to use eight of its chips to develop the infotainment system for Volkswagen vehicles. Over the past two quarters, the chipmaker has landed a total of four automotive design wins, including one at a "leading U.S. electric car OEM" during the first quarter.
According to Markets and Markets, the global IoT chip market could be worth $14.8 billion in 2022 growing at an annual pace of 13.2%. Now, automotive connectivity chips hold the highest market share in the Internet of Things (IoT) semiconductor space, opening up a potentially fertile ground for Skyworks to boost its revenue in the long run and help it further diversify its revenue stream.
The Foolish bottom line
Harsh Chauhan has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple and Skyworks Solutions. The Motley Fool has the following options: short August 2017 $85 puts on Skyworks Solutions, short November 2017 $95 calls on Skyworks Solutions, and short November 2017 $92 puts on Skyworks Solutions. The Motley Fool has a disclosure policy.