Skyworks Solutions Inc (SWKS -0.12%) designs analog semiconductors that power wireless connectivity in a number of different devices like smartphones, wearables, and smart-home systems. Given the proliferation of the Internet of Things (IoT) and smartphone connectivity, this has been a good business to be in the past few years.

Shareholders certainly have nothing to complain about this year. Shares are up 28% year to date, easily outpacing the S&P 500's returns by double digits. That being said, shares have dropped by almost 18% since the company reported its fourth-quarter and fiscal-year 2017 results in early November.

When a company's stock drops precipitously shortly after earnings are reported, it's healthy for investors to ask what caused the tumble. Sometimes it might represent legitimately bad news indicating that an investor's original thesis for investing in a stock is busted. If this is the case, it might be best for even long-term, buy-and-hold investors to sell. However, it can also be a case of a short-term obsessed market losing sight of the big picture. In the case of Skyworks Solutions, I firmly believe it is the case of the latter and that the recent drop represents a buying opportunity.

Skyworks Solutions Inc logo

Skyworks Solutions offers growth at a reasonable price, virtues difficult to find in this bull market. Image source: Skyworks Solutions Inc.

A closer look at the numbers

A close look at Skyworks' quarter doesn't find too much wrong. The company delivered record revenues of $984.6 million, an 18% increase year over year. Net income came in at $281.3 million, a 14% increase year over year. If the numbers were so bad, maybe the company's guidance was bad? Hardly. The company is calling for revenue to be up 15% to $1.5 billion and non-GAAP earnings per share to rise 19% to $1.91 next quarter.

Skyworks Solutions Metrics 2017 Q4  2016 Q4 Change
Revenue $984.6 million $835.4 million 18%
EPS (GAAP) $1.51 $1.31 15%
Operating Margin 35.1% 34.9% 20 basis points

Data source: Skyworks Solutions Inc 

The company's valuation also appears reasonable. Using Skyworks' full fiscal year non-GAAP EPS of $6.45, the stock is selling at a relatively cheap price-to-earnings ratio of 14.9; even using the company's GAAP EPS of $5.41, the P/E ratio is only 17.8.

The company's balance sheet is nearly pristine: It ended the year with a cash balance of $1.6 billion and no long-term debt. While Skyworks' balance sheet is clean, the valuation is reasonable, and the company is growing revenue and earnings at solid rates, what really makes the story compelling is Skyworks' positioning in two major macro trends.

An Internet of Things graphic with different icons surrounding the words superimposed in front a city street.

Skyworks Solutions is poised to capitalize on the growth of the Internet of Things and the massive 5G wireless network upgrade in the coming years. Image source: Skyworks Solutions.

The jump to 5G

Lest there be any doubt, 5G wireless networks are coming. In late November, Verizon Communications Inc (VZ -2.39%) announced it would be rolling out the next generation in wireless networks in three to five domestic markets next year, beginning with Sacramento, California.

The benefits of 5G networks will be incredible. During the company's fourth-quarter conference call, CEO Liam Griffin said 5G networks would provide a "significant boost in speed" and that 5G could be up to 100 times faster than 4G networks. Why does this matter to Skyworks investors? Because the chips Skyworks makes for 5G connectivity cost more and are more profitable than the chips for lesser network speeds. In the conference call, transcribed by S&P Global Market Intelligence, Griffin said:

"In order to make the leap to 5G, system architectures will require significantly more powerful connectivity engines to ensure the intense performance challenges are realized. This upgrade wave will create an enormous growth catalyst for the entire smartphone ecosystem.

"And as a leader in unwiring the planet, Skyworks is well positioned to capitalize. With extensive technology breadth and depth, strategic partnerships with all leading smartphone and IoT customers, differentiated system solutions enabling unmatched levels of integration and performance, all underpinned by our aggressive investments over the past 2 decades to expand our product portfolio, IP and scale. As a result, we have the profitability, cash flow and balance sheet to extend our leadership position. Our strategic R&D and CapEx investments will be pivotal as the scale and technology requirements around 5G intensify."

The IoT explosion

There are more connected devices than ever before. Everything from cars and watches to refrigerators and thermostats can be connected these days. Studies back up this observation. Research firm IDC believes total worldwide spending on IoT will increase from $800 billion this year to almost $1.4 trillion in 2021. Business Insider believes there will be 24 billion connected devices by 2020. On the conference call, Griffin said this number could be as high as 75 billion devices by 2025. He also said mobile data usage is expected to increase five times by 2021.

Few companies are better situated to capitalize on this undeniable trend than Skyworks. As Griffin pointed out, " ... by definition, these applications would not be possible without fast, secure, power-efficient connectivity solutions provided by Skyworks." Later he added that there's going to be a "massive upgrade cycle in the IoT space as well" with the onset of 5G.

Time to get greedy

In the short term, the company continues to trade on Apple rumors and speculation, because the smartphone maker is such a huge customer of Skyworks' products. For instance, when news leaks that an Apple supplier factory manager's nephew's former college roommate said they heard that the iPhone X wasn't going to be as big of a supercycle as previously thought, Skyworks shares will often dip that day. But, in the long term, investors need to realize that Skyworks Solutions is going for a reasonable valuation while poised to capitalize on some of the greatest industrial trends in the world today. In today's market, that is about as a good of an investment as you're going to find.