Is Skyworks Solutions a Buy?

It's been a forgettable year for owners of Skyworks Solutions (SWKS -0.54%). Though the semiconductor maker is larger than ever, the stock has declined to its lowest level since 2016. The reason? Declining sales of smartphones -- especially worry over key customer Apple (NASDAQ: AAPL) and how many iPhones will be sold in the next year.

Something similar happened to Skyworks in 2015, when the stock declined ahead of a smartphone sales slump in 2016. It's the nature of an industry that is starting to mature. Consumers in developed markets such as North America and Europe are holding on to devices for longer, and sales in emerging markets such as China are slowing down, too, as fewer people are without a smartphone. The result is a cyclical business that ebbs and flows with demand for phones. For Skyworks investors, though, there is money to be made if the stock is picked up on the ebb and given some time to run its course.

The future casts a long shadow

It's not that Skyworks Solutions' recently concluded 2018 fiscal year was a bad one. On the contrary, the connectivity chip maker turned in record sales and adjusted profits, excluding one-time tax items and changes.

Data source: Skyworks Solutions. p.p. = percentage point.  

With results coming in strong, why all the negativity -- as reflected in the 25% share price decline so far in 2018? It all has to do with the future. CFO Kris Sennesael said on the fourth-quarter earnings call that "continued strength in broad markets, coupled with the launch of a diverse set of new high-performance mobile solutions, is offsetting unit declines in premium smartphones and overall China softness."

As a result, first-quarter revenue is expected to decline 4% year over year, and adjusted earnings are slated to fall by 5%. Skyworks doesn't provide full-year guidance, so with uncertainty surrounding 2019 overall -- especially with some Wall Street analysts predicting a down year for the semiconductor industry -- that explains the steep decline in share price.

Nevertheless, the trailing-12-month price-to-earnings figure sits at 14.1, and the one-year forward P/E based on analyst expectations is a mere 8.7. That's implying a big rebound in the bottom line by this time next year. Those numbers are by no means official -- remember, that isn't based on Skyworks' guidance -- but there is reason to feel optimistic that the tide could soon turn.

A new connectivity supercycle on the horizon?

The iPhone is still a big deal at Skyworks, with over 40% of sales coming from Apple, so the company has been trying to diversify its customer base for some time. Billions of new devices have emerged that need a wireless network connection -- everything from cars, watches, and cameras to industrial and medical equipment and smart-home devices -- and the connectivity boom has been a big help in regard to Skyworks' diversification efforts.

Image source: Getty Images.

Furthermore, a new movement has emerged: the next-gen 5G mobile network. First iterations of the fast and low-latency service have already been launched, with more availability expected in 2019, and Skyworks is ready with a portfolio of 5G equipment to help build the new network and help consumers connect to it.

It's not just about smartphones, either: 5G could help unlock new uses for internet connectivity and accelerate technology such as autonomous cars and connected industrial equipment. According to a report Skyworks cited from Research and Markets, the "small cell" industry, the tech powering 5G, is expected to grow to $58 billion a year in 2024, up from just $13 billion in 2017.

Skyworks CEO Liam Griffin, setting an optimistic tone given growth from other connected devices outside the smartphone world, had this to say on the last earnings call:

We see compelling [total addressable market] growth driven by new product functionality, including 4x4 MIMO [multiple input, multiple output], antenna multiplexing, and new millimeter wave technologies. At the same time, the broader [Internet of Things] category continues to accelerate. With expanded 5G network capacity on the horizon, we expect 75 billion devices will be connected by 2025. That's three times today's installed base.

Is the stock a buy?

It's true that Wall Street thinks a bounce-back may be in the cards for Skyworks stock by the end of 2019. Whether that transpires or whether sales continue to languish for a bit longer than expected, there are enough irons in the fire to make me think shares are a buy right now either way. Connectivity is only growing in importance with billions of new devices coming online, and the launch of new mobile technology in the form of 5G is only just beginning. Skyworks Solutions has hung its fate on both movements, and it should be a prime beneficiary as they continue to grow.

With shares down sharply in 2018, now looks like the right time to start buying.