Skyworks Solutions (NASDAQ: SWKS) is having a good year. The chipmaker's business has rebounded with new smartphone releases stateside and a booming smartphone market in China. The company has also been working to diversify its revenue sources, and the "Internet of Things" still presents a big opportunity that could help the uptrend continue.
What is the Internet of Things?
The Internet of Things (IoT) is the movement to connect objects to the internet. That might conjure up images of the proliferation of the smartphone, which has helped connect people to one another and to data through what has become a compact mobile computer.
The IoT goes so much further than that, though. As access to high-speed internet has expanded, the ability to connect other consumer goods like cars, home appliances, and wearables has become a reality. On the business side, sensors are getting placed on vehicle fleets, equipment, and buildings to monitor and log information critical to operations.
A report from Gartner, a technology research and advisory firm, says that the number of connected devices could grow to over 20 billion by the year 2020, up from the estimated 8.4 billion in use this year. While Skyworks' bread and butter is making chips that power smartphones, that technology has carryover when it is applied to other devices too.
What Skyworks is up to
In the last reported quarter, the chipmaker highlighted a number of new design wins for its chips. There were, of course, new smartphones, including the Samsung Galaxy S8 and Huawei P10 phones. Later this year the Apple iPhone 8 will likely debut to the usual fanfare; it has several Skyworks chips in its inner workings.
The bigger long-term news has been coming from outside the smartphone world, as the company seeks to diversify away from its dependence on the sector. Some of the notable wins this last quarter were with Cisco on gateways that support broadband-speed machine-to-machine communications; designs for three unnamed automobile manufacturers supporting mobile and GPS connectivity; and analog control ICs (integrated circuits) for Nintendo's new Switch gaming console.
Other areas mentioned were in smart-home devices like wireless speakers and WiFi routers, industrial products like smart utility meters, and wearable consumer tech like smartwatches. Skyworks' potential to power devices seems only limited by what gets powered by electricity.
To buy or not to buy
There are concerns, however. One is that the massive growth in IoT will cause other chipmakers to pile into the market. Increased competition inevitably leads to lower pricing, which could put a damper on not only sales but also, more importantly, bottom-line profits.
With the IoT gaining momentum, though, that problem hasn't happened yet. The aforementioned Gartner report showed a 31% increase in connected devices in 2017 over those in use in 2016. If over 20 billion devices are put into use by 2020 as forecast, that would be annual compounded growth of nearly 35% in each of the next three years.
Case in point: Skyworks' profit margins have been on the rise as it adds these new revenue streams. Free cash flow -- money left over after business operations are paid for -- has also been posting impressive gains. Extra cash is important, as it can be returned to shareholders or invested in business expansion efforts.
There are no guarantees that the IoT will grow as much as expected, but the kind of growth momentum that is building means that even if it isn't as big as forecast, there's plenty of lunch to go around for everyone in the semiconductor world. Already a leader in getting phones hooked up to the web, Skyworks has promising opportunities as the IoT expands.
Nicholas Rossolillo owns shares of AAPL and Skyworks Solutions. The Motley Fool owns shares of and recommends AAPL, Gartner, and Skyworks Solutions. The Motley Fool has the following options: short November 2017 $95 calls on Skyworks Solutions and short November 2017 $92 puts on Skyworks Solutions. The Motley Fool recommends Cisco Systems. The Motley Fool has a disclosure policy.