Wall Street's short-sightedness was on full display when Skyworks Solutions (SWKS -0.55%) released its fourth-quarter results in early November. Despite superb execution and a decent outlook, shares of the chipmaker slipped to 52-week lows. The market was probably focused on problems at one of the company's prime customers -- Apple (AAPL -0.81%).
That's not surprising, as Apple accounted for 47% of Skyworks' revenue in its recently concluded fiscal 2018, up from 39% in the previous year. There's no doubt that such reliance on a single customer is a cause for concern for any company, but at the same time Skyworks' efforts to diversify its business shouldn't be ignored.
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Pulling the strings elsewhere
There's a lot of noise around Apple's proposed iPhone production cuts, and this has taken a toll on companies that supply iPhone parts. Qorvo, an Apple supplier that gets nearly 40% of its revenue from Apple, slashed its top-line forecast for the ongoing quarter. The company expects its revenue for the December-ended quarter "to be in the range of $800 million and $840 million, compared to its previous forecast of $880 million to $900 million, due to recent demand changes for flagship smartphones."
However, Skyworks hasn't given out any such warning. Its revenue actually improved year over year in the last-reported quarter, while the guidance for the December-ended quarter was not way off the mark. The company expects $1.01 billion in revenue this quarter, which is only slightly below the consensus estimate of $1.07 billion.
More importantly, Skyworks expects to deliver its 10th consecutive year of revenue and non-GAAP earnings growth this fiscal year, which started in late September. Analysts expect that the company's top-line growth will get even better in fiscal 2020, and it won't be surprising to see Skyworks actually doing that as it diversifies its business into other lucrative niches.
The company's move into the Internet of Things (IoT) market is one of the biggest reasons why Skyworks expects to deliver yet another year of financial growth. Skyworks has been gradually building its non-mobile revenue by moving deep into various IoT niches, and it expects double-digit revenue growth in that segment in fiscal 2019.
Currently, Skyworks gets 28% of its revenue from the broad markets segment (the formal name for the non-mobile business). This segment is currently tracking annual revenue of over $1.1 billion, and double-digit growth there should help the company mitigate any weakness in the mobile part. However, Skyworks is capable of logging stronger growth in the broad markets business as its design wins in the IoT market move into the production phase.
Companies including Hyundai, Tesla, Toyota, BMW, and Geely have elected to use its connectivity and telematics solutions. The company has also supplied smart audio solutions to Sony, Nintendo, and Microsoft for their gaming consoles.
So Skyworks seems to be partnering with the right players to give its non-mobile business a nice shot in the arm, which should ensure that the company gets more revenue from this area in the future. But at the same time, investors shouldn't miss the fact that the company's mobile business is sitting on a major catalyst that could pay off sooner than later.
The next big thing in mobile
Apple's potential iPhone production cuts don't seem to bother Skyworks management much, as the chipmaker gave clear signs of content gains in the new devices. In the words of CEO Liam Griffin:
What we have here is a great demonstration of content gain and moving up to some very complex engines within premier smartphones and that had been a lot of hard work that we've done over the last six months to nine months to make that happen.
Of course, the company did admit that it saw "a bit of a unit miss" late in the fourth quarter, but it looks like the content gains helped make up for some of that weakness. A teardown of some of the latest iPhones indicates that Skyworks is supplying a lot more chips. That can be attributed to the fact that Apple's iPhone XS and XS Max models carry much faster cellular performance than earlier devices and even the iPhone XR.
Apple has brought about these improvements by integrating a couple more antennas into the new devices to support more frequencies. This should have boosted demand for Skyworks' carrier aggregation switches, which are critical to the integration of new antenna switch modules.
Demand for such carrier aggregation switches is slated to increase in the long run once 5G networks are deployed. It is estimated that 5G smartphone shipments will shoot up from a level of only 2 million units next year to more than 1.5 billion units in 2025.
Skyworks is already looking to sink its teeth into this market. It has launched antenna tuning solutions that should help it gain traction in 5G smartphones, and is now looking to step up its game by targeting mobile operators through its 5G small cell solutions. This is a smart move from Skyworks, as small cells will play a critical role in enabling the deployment of 5G networks, which is why their sales are expected to go up from just $13 billion last year to $58 billion in 2024.
Don't miss the big picture
Skyworks Solutions' outlook might have missed Wall Street's estimates by a whisker, but investors need to keep their eyes on the bigger opportunity. The company is going after markets that have solid growth potential in the long run, and now would be a good time to buy into those catalysts.
I say this because Skyworks is trading at less than 9 times next year's earnings, but its earnings are expected to grow consistently over the next two years and beyond. As such, savvy investors looking for an attractive IoT and mobile play should definitely consider Skyworks Solutions given its growth potential and attractive valuation.
