Earlier this month, Skyworks Solutions, Inc. (SWKS -1.69%) reported another solid quarter. The analog semiconductor designer, responsible for the wireless connectivity in devices such as smartphones, wearables, and smart-home systems, saw revenue grow to $1.05 billion, a 15% increase year over year, and non-GAAP earnings per share rise to $2, a 24% increase year over year.
Even better, the company's margins continue to improve, showing the company's complex chips are resisting, at least for now, the march to commodification that plagues so many other semiconductor chip makers.
|Skyworks Solutions Metrics
|130 basis points
Yet Skyworks' stock price continues to meander. In the past six months, Skyworks shares have advanced a measly 1%, and over the past year shares are up less than 12%. Both cases represent market-lagging returns.
The Apple supplier conundrum
The share price continues to amble, even as the company excels, because Skyworks has been given the dreaded label of being an Apple, Inc. (AAPL -0.84%) supplier. As such, every time Apple sneezes, Skyworks is diagnosed with the flu -- as if it's a bad thing to have the world's best-selling smartphone and most-recognized brand as your best customer.
To be sure, Skyworks Solutions' customer concentration risk with the world's largest smartphone manufacturers remains somewhat of a threat. But Skyworks' management is confident that its technical know-how and expertise will continue to keep it ahead of competition and keep customers, like Apple, from shopping elsewhere.
In the meantime, here's a little thought experiment. Instead of looking ahead to just the next quarter or two (even though Skyworks' near-term guidance remains solid), try to imagine where Skyworks might be in five years. For just a minute, stop worrying whether iPhone sales might be down a smidge next quarter, and try to see the two huge macro trends that could drive top- and bottom-line growth at Skyworks for years.
The coming generational shift to 5G
The fifth generation of wireless networks, commonly referred to as 5G, is coming fast; several cities in the U.S. will see it this year. The benefits of 5G will be enormous, bringing much faster speeds to wireless connections, which will enable more mobile applications than ever before. Earlier this year, Skyworks Solutions released its Sky5 platform, a suite of solutions designed to support and enable 5G applications in mobile devices. In the company's first-quarter conference call, CEO Liam Griffin provided more color on this platform:
"The deployment of our Sky5 platform accelerates our mission to enable the data-driven world, while alleviating the digital traffic jam created in current 4G networks. 5G is critical to resolving this challenge, opening entirely new lanes of spectrum. 5G will represent a significant boost in speed; up to 100 times of that 4G networks. 5G will offer extremely low latency, a requirement for mission-critical applications such as the driverless car, machine-to-machine, and robotics. 5G will also be a major catalyst to the expansive rollout of IoT, greatly expanding network capacity and improving reliability. "
The great thing about the Sky5 platform is that it will still support 4G and even some 3G solutions, because it is just an addendum to Skyworks' 4G system. This means it can be placed in all devices, as extra dollar content to Skyworks, no matter which network the phone will first utilize. Asked when 5G will begin materially contributing to Skyworks top and bottom lines, Griffin replied, "And if you look out into 5G -- we'll start to see early indications of 5G in the 2019 platforms, and more so in 2020."
The IoT explosion
The Internet of Things (IoT) is the collective name given to the growing number of devices that are connected to each other and the cloud. Research firm IDC estimates that worldwide spending on the Internet of Things will reach about $1.4 trillion by 2021, up from an approximate $800 billion in 2017. In the company's fourth-quarter conference call, Griffin said he believes there could be 75 billion connected devices by 2025 and that mobile data usage could increase fivefold by 2021.
How accurate these estimates prove to be remains to be seen. What cannot be denied is that the number of connected devices and data usage are going up -- a lot! And that's not a trend that looks like it might reverse anytime soon. As Griffin succinctly pointed out in the company's 2017 fourth-quarter conference call, "... by definition, these applications would not be possible without fast, secure, power-efficient connectivity solutions provided by Skyworks." In this quarter's conference call, Griffin called out several key design wins with customers in IoT devices, including new deals with Alphabet, Amazon.com, NetGear, and Comcast.
Aim for the Sky(works)
So often the noise on Wall Street only focuses on short-term concerns and problems. That's fine, but it's a shame when individual investors get caught up in that vicious cycle because, often, the best opportunities for investors are in taking a long-term outlook. With Skyworks, many people can't seem to get around the fact that iPhone sales might be slightly down over the next few months. Whether that's true or not, the long-term thesis for Skyworks Solutions remains intact and, I highly suspect, five years from now investors will be looking back at today's prices with longing and envy.