Skyworks Solutions (NASDAQ:SWKS) -- which produces power amplifiers, front-end modules, and RF chips for a wide variety of markets -- rallied more than 1,200% over the past decade. This means that an investment of $100,000 back in 2007 would be worth $1.24 million today.
Skyworks was founded in 2002 through a merger between chipmakers Alpha Industries and Conexant Systems. But investor interest in Skyworks didn't pick up until Apple (NASDAQ:AAPL) launched its first iPhone in 2007. Skyworks became one of Apple's top suppliers, and 40% of its revenue came from the iPhone maker in fiscal 2016.
As a result, Skyworks is often mentioned as a top supply chain play on the iPhone. But with iPhone sales peaking, does Skyworks still have the momentum to generate multibagger returns from current prices? Or is it evolving into a mature tech stock with limited growth potential?
Understanding Skyworks' long-term growth plans
Skyworks is well aware that its Apple-generated tailwind could become a headwind if iPhone sales miss market expectations. To reduce its dependence on Apple, Skyworks is growing its content share in Internet of Things (IoT) devices like smart speakers, home automation devices, wearables, and industrial internet machinery.
Skyworks' RF technologies should also play a crucial role in connecting cars to the IoT. During its half-year investor presentation, Skyworks revealed that the new Jaguar Land Rover sported its SkyOne cellular module and three antenna switches. The chipmaker also launched new modules for vehicle-to-vehicle communications last quarter.
It's also supplying more chips to other smartphone OEMs. At the beginning of 2016, Skyworks reported a content share of just $1 to $2 per 3G device, over $3 per 4G device, and more than $5 per "advanced" 4G device.
But during last quarter's conference call, CEO Liam Griffin declared that certain high-end 4G devices, like Huawei's P9 phones, were "approaching $9 to $10" in content -- indicating that as phones pile on more features, Skyworks' revenues per device will rise.
But that transition will take time...
The problem for Skyworks is that transition takes time and relies on bullish industry forecasts. In reality, the IoT market might miss the company's forecast for 75 billion connected devices by 2025 due to mass adoption, security, or compatibility issues. Niche markets like home automation could also fail to evolve into mainstream ones.
Driverless cars, which industry experts claim will hit public roads within the next decade, could fail to win over nervous drivers. Over half of U.S. drivers still feel unsafe sharing roads with driverless cars, according to a survey by AAA earlier this year.
If these markets fail to launch before iPhone sales start sliding, Skyworks' top line growth could suffer. Apple could also split or rotate its supply chain among Skyworks rivals Qorvo, Texas Instruments, and Broadcom, as it did with numerous component suppliers in recent years.
But for now, analysts seem confident in Skyworks' ability to keep growing, with estimates calling for 11% sales growth and 15% earnings growth this year. Those numbers look solid, but they're arguably too weak to support "multibagger" gains.
The valuations, buybacks, and dividends tell the tale
If investors were expecting Skyworks to double or triple in the near future, it would likely trade at premium valuations. But the stock trades at 20 times earnings, compared to the industry average of 24 for semiconductor makers.
A rapidly growing company would also be spending most of its cash on expanding its business. Instead, Skyworks spent 46% of its free cash flow on buybacks and 16% on dividends over the past 12 months. That's the behavior of a "mature tech" company instead of a high-growth one.
The verdict: It's a good stock, but not a likely multibagger
I like Skyworks as an investment, but it probably isn't a "millionaire maker" stock anymore. Investors looking for a good blend of growth and dividends should buy Skyworks, but those seeking multibagger returns should look for smaller companies with more room to run.
Leo Sun has no position in any of the 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 Broadcom Ltd. The Motley Fool has a disclosure policy.