Both chipmakers have taken advantage of smartphones and other consumer electronic items, most notably by supplying chips to Apple. But they are now diversifying into new areas such as automotive, virtual assistants, and the Internet of Things to ensure long-term growth, while also tracking emerging technologies in consumer electronic devices. But are the catalysts and valuations enough to warrant a long-term investment? I think so.
The case for Skyworks
Skyworks has been trying hard to wean itself from being seen as predominantly an Apple supplier. This is not going to happen in the blink of an eye, though, as Cupertino supplies 40% of its total revenue. But the chip specialist has already set the wheels of diversification in motion.
By targeting automotive connectivity and virtual assistant devices, Skyworks has been able to enhance its non-mobile revenue to 27% of the top line. This is just the beginning as both these markets are still in their early phases of growth. For instance, connected car sales could grow at an annual pace of over 35% until 2022, and this will boost demand for vehicle-to-vehicle connectivity chips.
More specifically, vehicles will need more semiconductor chips to talk to each other or to the cloud, with one estimate saying chip content will jump from $332 per vehicle to $374 per vehicle in 2019. The good news is that Skyworks has already started volume shipments of its 802.11p vehicle-to-vehicle connectivity modules, which is the most widely accepted standard for this application.
Skyworks, however, hasn't gone into the specifics of its automotive business, making it difficult to pinpoint its exact value. But the company's expertise and experience in making radio frequency chips should help it tap the secular growth available.
But Skyworks management seems more excited about its improving traction in smart-home systems. The company recently revealed that it has launched motion detectors and home security sensors for Honeywell and Bosch, setting itself up to tap a market that's expected to clock an 18% growth rate per year.
More importantly, Skyworks' focus on security systems from Honeywell could be a big deal in the long run as the industrial giant has been aggressively improving its presence in this space. Honeywell made two major acquisitions last year to boost its presence in the home security market, apart from acquiring some mid-sized companies at the dealer level, which could eventually enhance Skyworks' sales.
The case for Cypress
Just like Skyworks, Cypress is also focusing on the automotive opportunity to accelerate long-term growth. But the difference lies in the fact that it has already made some tangible progress. For instance, the company already counts Toyota, Audi, Bosch, and Continental as customers for its automotive microcontrollers, believing that these partnerships will increase its addressable market by an average of 10% over the next five years.
But automotive is just one of the many avenues that could power Cypress' long-term growth. The company has a massive opportunity in USB-C connectivity, which is fast gaining traction in consumer electronic items as it reduces charging time, increases data transfer speeds, and has a slim profile.
Cypress is rumored to supply the USB-C chip to Apple, but there is a huge opportunity in this space even if it fails to land this spot. Cypress controls 35% of the USB-C market thanks to a strong client base that consists of five of the top six PC OEMs (original equipment manufacturer), apart from smartphone giants such as Samsung.
What's more, even mid-range smartphones are now being equipped with USB-C technology. Not surprisingly, ABI Research believes that sales of USB-C-equipped smartphones could jump to 830 million units in 2021 from just 60 million last year. This excludes the uptake of the technology by notebook PCs, which present another potentially fertile ground for Cypress.
Meanwhile, Cypress has also decided to jump into the smart-home space with its Wi-Fi and Bluetooth Low Energy (BLE) chips. The company claims that its recently launched ultra-low-power microcontrollers for smart-home and Internet of Things applications provide 26% more battery life than the closest rival. This could be a strong selling point for its products.
But what do investors have to pay for the potential growth of both these companies? Both Skyworks and Cypress look like value picks. Skyworks has a trailing price-to-earnings ratio of 20 and a forward price-to-earnings ratio of 14, indicating expected earnings growth.
The chipmaker's current valuation is almost equivalent to its median P/E ratio over the past 13 years. Furthermore, Skyworks' current P/E ratio is lower than the industry average of 23.2, making it a good value pick.
Cypress, on the other hand, isn't yet profitable so it doesn't have a P/E ratio as it has no earnings. However, investors won't have to pay through their nose for this stock, either, as its trailing price-to-sales ratio is lower than peers'.
More specifically, Cypress Semiconductor has a P/S ratio of just 2, which is exactly half of the industry average. Furthermore, the company's P/S ratio is currently lower than its five-year average of 2.3, indicating that it is still a good bet despite the impressive stock market rally.
The Foolish takeaway
Both chipmakers look like value plays when compared to the potential growth that they can deliver based on the huge end-market opportunities that they can tap. On one hand, Skyworks has numerous catalysts in smartphones, automotive chips, and smart homes. Meanwhile, Cypress can take advantage of the secular growth in the USB-C market and applications in the automotive space.
Investors can safely consider these two stocks from a long-term perspective given their massive growth opportunities and attractive valuation levels.
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 November 2017 $95 calls on Skyworks Solutions and short November 2017 $92 puts on Skyworks Solutions. The Motley Fool recommends Cypress Semiconductor. The Motley Fool has a disclosure policy.