The U.S.-China trade war isn't cooling off, as the two countries have taken their fight a notch higher after the latest round of tariff impositions. This is bad news for companies such as Skyworks Solutions (NASDAQ:SWKS), whose financial performance took a hit in the last-reported quarter because of its deep ties with China's Huawei.
Skyworks investors were already warned that its reliance on Huawei for 12% of its total revenue would drag it down, and it wasn't surprising to see the chipmaker's top and bottom lines drop. But management tried putting on a brave face and said that the company's long-term prospects are still intact, focusing particularly on the opportunity in fifth-generation (5G) wireless networks.
But, will Skyworks be able to take advantage of the 5G rollout in the face of the intensifying trade war with China?
Lost opportunity in China?
China is a huge telecom market, home to three of the world's top 10 mobile network operators. China Mobile is the world's largest telecom company, with more than 850 million subscribers, outpacing second-place Vodafone's subscriber base of nearly 470 million by a huge margin.
Not surprisingly, the rollout of 5G networks in China is going to create a big opportunity for chipmakers such as Skyworks to make money. In fact, China is expected to spend a whopping $180 billion on 5G infrastructure in the coming years, starting in 2019. However, the U.S.-China trade war is shaping up to be a big hindrance.
Huawei has reportedly scored half of China Mobile's 5G contracts already. Had there been no trade war, Skyworks would have had a great opportunity to ride China's 5G investments through Huawei. But that looks unlikely right now, as the company in August said it expects the chipmaker's Huawei business "to remain well below historical levels into the current quarter."
Skyworks is counting on 5G deployments elsewhere to drive growth
Skyworks rattled off a list of 5G design wins in a slew of international markets last quarter and also pointed out that smartphone suppliers such as Samsung, LG, Oppo, Vivo, and others are using its chips to build 5G-capable devices.
Meanwhile, automotive manufacturers, component suppliers, and industrial conglomerates (which constitute Skyworks' broad markets business) such as Ford, Continental, Bosch, Honeywell, GE, and Siemens are tapping Skyworks for enabling 5G connectivity, according to the company.
However, we won't be seeing the financial impact of all these opportunities on Skyworks' business anytime soon. The company's guidance suggests that its revenue will crash 18% annually in the quarter that ended in September, while earnings per share are expected to fall 23%.
What investors need to understand is that Huawei alone is not responsible for this downturn. A soft smartphone market -- especially declining iPhone sales -- carry much more responsibility for Skyworks' weakness. The bad news is that the smartphone market continues to decline, with IDC reporting that worldwide, second-quarter 2019 shipments fell 2.3% from last year.
Mobile is Skyworks' biggest source of revenue, supplying 63% of the top line last quarter. So the company is unlikely to rebound until there is a turnaround in smartphone sales. Ironically, Huawei is one of the very few smartphone OEMs (original equipment manufacturers) that's defying the downturn, but Skyworks won't be able to take advantage of that opportunity.
Investors should wait and watch from the sidelines before buying Skyworks Solutions stock based on its 5G prospects. If the company's partnerships fail to click and the smartphone market doesn't recover, investors could end up losing money.