One wireless chip company that has done well for investors over the years is Skyworks (SWKS 5.45%), which makes chips that are critical in applications such as smartphones. According to the company's most recent investor presentation, it has enjoyed a 17% revenue compound annual growth rate (CAGR) and a 27% earnings per share (EPS) CAGR.
Here, I'd like to go over three of the top growth opportunities ahead of Skyworks.
Image source: Skyworks.
1. 5G
One trend that has benefited Skyworks over the years has been the increasing complexity of wireless subsystems in smartphones. According to the company, its dollar content in a typical 2G cellphone was around $3. That figure grew to about $8 for a 3G smartphone, and then saw a step-function increase to $18 with the move to 4G.
As you might know, the mobile industry is in the midst of a transition to 5G wireless. There have been some initial 5G product announcements, but 5G-capable devices are expected to roll out in much greater volumes over the course of 2020 and beyond.
That transition, perhaps unsurprisingly, is set to benefit Skyworks. According to the company, the move to 5G should drive yet another leap in dollar content to about $25 per smartphone. Put simply, even if the overall smartphone market doesn't grow or even shrinks slightly, the transition to more advanced 5G wireless capability should enable another big jump in Skyworks' per-device dollar content, ultimately enabling growth.
Check out the latest earnings call transcript for Skyworks.
2. Connected cars
Another opportunity that the company highlighted is the connected car. The idea here is simple: As cars become increasingly smart, they're also going to need to be endowed with the ability to connect to other computing devices. This means that they'll be endowed with Wi-Fi/Bluetooth as well as cellular connectivity.
That's an opportunity for Skyworks.
The company says that a so-called "complete 5G system architecture" in a connected car will require between $15 and $20 of Skyworks' chip content. Now, according to IHS Markit, 94.5 million light cars were sold in 2017, up 2.4% year over year.
Now, the overall market potential for Skyworks isn't anywhere close to, say, what the smartphone opportunity has been and currently is. For some perspective, Canalys claims that worldwide smartphone unit shipments totaled nearly 1.4 billion in 2018. Nevertheless, connected cars represent incremental volume and should leverage the same technology that's developed for smartphones, anyway.
3. Internet of Things
Another growth opportunity for Skyworks is the set of products that fall under the umbrella term Internet of Things (IoT). According to Skyworks CEO Liam Griffin on the most recent earnings call, the company has "extended [its] technology leadership in cellular and are capitalizing more broadly across the Internet of Things, leveraging a diverse set of connectivity protocols, including WiFi, Bluetooth, ZigBee and GPS."
The executive also highlighted how 5G technology "will fuel a broad array of markets and applications ranging from industrial IoT, automotive, machine-to-machine, healthcare, smart cities as well as artificial intelligence."
For investors, the thesis here is simple: As more products become "smart," they'll also need wireless connectivity to receive and transmit data. That should create significant long-term opportunities for wireless chipmakers like Skyworks.
Investor takeaway
Skyworks' business has benefited handsomely from the multiyear growth of the smartphone market and the dollar content that came from increasingly complex wireless subsystems. Looking ahead, the company still looks poised to benefit from the never-ending advances in wireless technology, even if smartphone unit sales aren't growing.
Additionally, the company appears to have significant opportunities in the automotive market, as well as more broadly across the IoT. Those opportunities, as well as Skyworks' ability to capitalize on them, will reveal themselves over time, but as long as the opportunities prove real, there's little doubt in my mind that Skyworks will profit handsomely from them.
