Smartphone chip suppliers have been under a lot of stress over the past year, especially those who rely on Apple (AAPL 2.52%) for a sizable chunk of their revenue. Cupertino's declining influence in the smartphone industry has caused consternation among chipmakers that were enjoying terrific gains when iPhone sales were strong.
Skyworks Solutions (SWKS +0.66%) is one such company that was flying high in the iPhone's heyday, but the reality of depending on just one customer for nearly half of the business has hit it hard. The chipmaker's first-quarter results for fiscal 2019 were not good, and it is now looking at double-digit top- and bottom-line drops this quarter.
However, Skyworks is really cheap from a valuation perspective and it has been taking steps to diversify its business beyond Apple. But are these two reasons enough for investors to bet on a turnaround at Skyworks? Let's find out.
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Why Skyworks looks like a value play
With a price-to-earnings (P/E) ratio of 13 (as of this writing) that's well below Skyworks' five-year average multiple of 21, now might be a good time to buy the stock as it looks well-placed to take advantage of emerging opportunities such as the Internet of Things (IoT) and fifth-generation (5G) wireless networks. In fact, the momentum of the company's non-mobile division, formally classified as the broad markets business, was strong enough to offset the weak volumes in mobile in the most recent quarter.
More specifically, the broad markets business supplied 27% of Skyworks' total revenue last quarter, amounting to $262 million on the back of double-digit annual growth. This business had produced less than 25% of the company's total revenue in the prior-year period, so it has held its ground despite the broader weakness in the semiconductor industry.
The good news is that this business looks well-placed to deliver further growth on the back of the company's numerous partnerships to supply its connectivity chips for IoT applications. For instance, Skyworks has been selected by Square to securely power its long-range retail payment systems. German and Korean automotive companies are tapping the chipmaker for supporting remote access features in their cars, while Philips is using Skyworks' wireless engines for its street lighting platforms.
In all, Skyworks listed a series of partnerships in the non-mobile business across several verticals such as automotive, smart audio, smart homes, and IoT connectivity that should help it sustain the momentum of its broad markets business going forward. Additionally, the 5G business is going to be another catalyst for the broad markets segment thanks to an increase in demand for base station solutions.
The company's connectivity chips are already being used by European infrastructure providers in 5G base stations. This business will only get bigger as 5G is still in its early phases of deployment. According to one estimate, 5G investments will grow to $48 billion in 2027 from $18.6 billion in 2020, so there's a lot of room for Skyworks to grow.
Check out the latest Skyworks earnings call transcript.
The mobile mess
But the fact that Skyworks depends on mobile for 73% of its revenue, and more importantly on Apple, is likely to weigh on its prospects, at least in the near term. Skyworks blamed weak Chinese smartphone demand for its mobile troubles in 2018, which wasn't surprising as device shipments in the country fell in the range of 12%-17%, according to different estimates.
The bad news for Skyworks is that the Chinese smartphone market could contract once again in 2019. Market research firm Canalys, for instance, forecasts that smartphone sales in the country will shrink around 3% this year. Now that represents an improvement over last year's level, but don't be surprised if the drop is more severe as consumers could put their upgrades on hold as they wait for new 5G handsets to hit the markets.
The problem, however, is that 5G handsets are still some time away from a meaningful ramp up in sales. According to one estimate, 77 million 5G handsets will be shipped in 2021. But in 2019 and 2020, only 2 million and 11 million 5G handsets, respectively, are expected to be shipped. So investors shouldn't expect a sudden turnaround in Skyworks' mobile business.
That's because 5G handset sales will pick up substantially post-2021, with annual shipments expected to rise to 1.5 billion by 2025. Skyworks is ready to pounce on this opportunity as it has already launched 5G smartphone chips.
What should investors do?
There's no doubt that Skyworks is trying hard to find ways to grow its business beyond Apple, but it is unlikely to escape Cupertino's shadow anytime soon. That's because iPhone sales have been declining and Apple has been forced to reduce production of its smartphones because of weak demand.
As such, it won't be surprising to see Apple's iPhone sales decline further for the next couple of quarters. Skyworks might receive some respite in the latter half of the year when new devices are launched, buteven then, a turnaround isn't guaranteed considering the response to the latest iPhone family and overall smartphone weakness.
So it will be prudent for investors to watch Skyworks stock from a distance, even though it is cheap right now, and look for signs of a turnaround before going long.
