The fifth-generation (5G) smartphone market is on the cusp of rapid growth. That's great news for Skyworks Solutions (SWKS -0.55%), Qorvo (QRVO -1.08%), and Qualcomm (QCOM -2.53%), who have been waiting for a new catalyst to pull them out of the rut of stagnating sales.
As it turns out, the catalyst is almost here. TSMC recently announced a $5 billion increase in its 2019 capital spending, citing stronger-than-anticipated demand for 5G smartphone chips. TSMC anticipates that 5G smartphones will account for a mid-teens percentage of the overall market, up from its prior estimate of single-digit penetration.
Now that the world's biggest semiconductor foundry is calling for an increase in demand for chips thanks to the 5G smartphone revolution, it's a good time to consider these three stocks for your portfolio.
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1. Skyworks desperately needs 5G to turn its mobile business around
The slowdown in the smartphone market has taken a toll on Skyworks Solutions, which gets 63% of its total revenue by supplying mobile chips. The slowdown caused the company's fiscal third-quarter revenue to plunge 14% year over year to $767 million.
Weak smartphone sales, seasonality, and restrictions on sales to Chinese smartphone maker Huawei dented Skyworks' top and bottom lines during the quarter. But the company is optimistic that the arrival of 5G smartphones will give its mobile business a shot in the arm thanks to its relationships with a variety of smartphone original equipment manufacturers (OEMs). CEO Liam Griffin pointed this out on the latest earnings conference call: "Finally, in mobile, for the coming wave of 5G phones, we've deepened our engagements with key customers, leveraging our unique suite of solutions to support launches at Samsung, LG, Oppo, Vivo and others."
In the meantime, Skyworks' dependence on Apple (AAPL -0.81%) for nearly half of its total revenue could prove to be another tailwind. Strong demand for the iPhone 11 has reportedly encouraged Apple to increase its production forecast of the latest devices to the tune of 8 million units, which is 10% higher than the original estimate as per the Nikkei Asian Review. (More on Apple's 5G efforts below)
What's more, if the U.S. and China decide to bring an end to the trade war and Skyworks is able to sell to Huawei once again, it could witness a $350 million surge in sales next year, according to Cowen estimates. This could add $0.60 per share to the company's earnings, the investment bank believes.
Skyworks is trading at less than 17 times last year's earnings and has a forward price-to-earnings (P/E) ratio of 14. These multiples are lower than the company's five-year earnings multiple of almost 20. So now would be a good time for investors to consider going long on Skyworks stock, because its fortunes could soon turn around.
2. Qorvo can get a new lease on life
Qorvo did well to deliver double-digit top-line growth in the first quarter of fiscal 2020 -- beating its original revenue estimate -- despite a slew of headwinds.
But Qorvo's dependence on Huawei for a substantial chunk of revenue could prove to be a dampener when the company releases its second-quarter report at the end of October. The chipmaker is already calling for a mid-teens revenue crash in the second quarter, because the business from Huawei could drop to just 10% of revenue this fiscal year as compared to 22% of the total revenue in the first quarter.
However, just like with Skyworks, Apple could prove to be a savior for Qorvo, since Cupertino company supplies around a third of the chipmaker's total revenue. An increase in iPhone builds, as pointed out earlier, has the potential to boost Qorvo's revenue in the near term. But more importantly, the deployment of 5G in the 2020 iPhone generation could turn out to be an even bigger catalyst for Qorvo.
Cowen analyst Karl Ackerman estimates that the addition of 5G will boost radio-frequency chip components in the iPhone by 40%. This will increase Qorvo's addressable opportunity and help offset the Huawei damage to some extent. Moreover, Qorvo has started scoring 5G smartphone design wins already.
According to CEO Bob Bruggeworth, a China-based smartphone OEM has already selected Qorvo to supply 5G chips. As the demand for 5G smartphone chips has started picking up the pace, the chipmaker could land more design wins and put the Huawei weakness behind it.
Finally, investors shouldn't forget that Qorvo was able to begin shipments of certain products to Huawei in the fiscal first quarter. It also applied for a license in a bid to increase the number of products it can sell to the Chinese company. This could work in Qorvo's favor, since the Trump administration recently announced that it plans to approve some of the licenses.
If Qorvo can get past the Huawei ban, it could gain a whopping $500 million in revenue and $1 per share in earnings next year, according to Cowen.
3. Qualcomm: The sure-shot beneficiary of 5G smartphones
Qualcomm could be one of the biggest beneficiaries of the transition to 5G smartphones, because it controls 43% of the baseband processor market in terms of revenue, according to Strategy Analytics. The second-placed HiSilicon is significantly behind with a revenue share of just 15%, so Qualcomm's domination doesn't seem to be under threat.
More importantly, Qualcomm looks all set to take advantage of its dominant position in baseband processors in a 5G world because of the moves it has already made.
Qualcomm has entered the 5G smartphone arena with its 8-series Snapdragon chip that's powering high-end devices from Samsung, LG, Oppo, OnePlus, and Xiaomi. It now plans to broaden its 5G chipset portfolio next year by adding affordable offerings to power lower-priced smartphones.
Qualcomm said in September that it will launch 5G-enabled 7-series and 6-series Snapdragon processors next year. This move will expand Qualcomm's addressable opportunity into mid-range and budget devices and set the company up for long-term growth. More importantly, Qualcomm expects the 5G catalyst to show up on its financial performance sooner rather than later.
According to Qualcomm CFO David Wise:
We expect 5G device volumes to ramp more meaningfully in early calendar 2020 with new flagship device launches from global and Chinese OEMs supporting 5G.
In QCT, as we transition to 5G, our addressable dollar content opportunity per device is up to 1.5 times greater than a comparable 4G device, giving greater chipset complexity and our ability to capture 5G RF front end content.
Meanwhile, IDC estimates that 5G smartphone shipments will jump to 123.5 million units in 2020 -- accounting for 9% of total shipments -- and take off remarkably in subsequent years to make up 28% of total smartphone shipments by 2023.
This expanding end-market opportunity, along with a strong market share, a greater dollar-content opportunity, and a wide portfolio of 5G chipsets, has the potential to make Qualcomm a top stock in the 5G smartphone era.
