Better 5G Buy: Skyworks Solutions vs. Qualcomm

The 5G infrastructure market could grow at a compound annual growth rate (CAGR) of 43% between 2018 and 2024, according to Mordor Intelligence. That's why tech companies often cite the 5G market as a catalyst for long-term growth.

Skyworks Solutions (SWKS 1.37%) and Qualcomm (QCOM 1.41%) represent two different ways to profit from that growth. Skyworks supplies RF chips for the mobile, automotive, broadband, wireless infrastructure, home automation, industrial, and military markets. Qualcomm is the world's largest maker of mobile application processors and baseband modems.

Image source: Getty Images.

Skyworks has been a laggard over the past year, rising just over 10% as Qualcomm's stock soared more than 30%. But will Qualcomm remain a stronger stock than Skyworks as 5G networks expand?

How do Skyworks and Qualcomm make money?

Skyworks provides power amplifiers, front-end modules, and RF chips to a wide range of customers, but its most prominent customer is Apple (AAPL 0.55%). Skyworks produces the power amplifier modules (PAMs) and diversity receive front-end (DRx) modules for the latest iPhones, and 47% of Skyworks' revenue came from Apple's contract manufacturers and distributors in 2018.

Its other major customers include Samsung and Huawei, which accounted for about 10% of its revenue in previous years. It provides those customers (and other leading smartphone OEMs) with similar PAMs and other modules that link devices to WiFi and mobile networks.

Qualcomm's Snapdragon SoCs are the most widely used mobile chipsets in the world. These SoCs bundle together an ARM-based application processor, a GPU, and a baseband modem as an all-in-one solution for smartphone makers.

This chipmaking (QCT) business generates most of Qualcomm's revenue, but most of its profits come from its higher-margin patent licensing (QTL) business, which generates royalties from every smartphone sold worldwide. Qualcomm's dominance of those two markets, along with some aggressive bundling and exclusivity strategies, sparked several antitrust probes in recent years.

What do 5G networks mean for both companies?

Skyworks mentioned 5G technologies nearly 50 times during its third-quarter conference call. CEO Liam Griffin stated that Skyworks' design "win pipeline is expanding" as it capitalizes on "the ramp of 5G" across the wireless infrastructure, smartphone, and IoT (Internet of Things) markets.

Image source: Getty Images.

Those solutions include 5G macro base stations and small cell radios for major European, Japanese, and Korean customers, as well as IoT chips for consumer devices like Facebook's VR headsets, Vizio's sound bars, and various wearable gadgets that merge WiFi and cellular technologies. It also secured low-power LTE CAT M design wins with major module makers like Sierra Wireless.

Griffin noted that with 5G now launched on four continents, the company expects the market's "momentum to continue building into 2020 and beyond" as 5G becomes a "universal connector" for next-gen devices.

Qualcomm mentioned 5G over 100 times in its third-quarter conference call, and CEO Steve Mollenkopf repeatedly highlighted the company's dedication to launching new 5G Snapdragon chipsets and stand-alone baseband modems to keep pace with carrier upgrades to 5G networks. The company is also expanding its total number of 5G patents.

Mollenkopf noted that 5G networks were "progressing at a much faster rate when compared to 4G" and that "all of the major Android OEMs have announced 5G devices for this year and as volume ramps in early 2020." He also noted that the company's number of 5G design wins doubled quarter-over-quarter.

Which company will grow faster next year?

Wall Street expects Skyworks' revenue to dip 13% this fiscal year (which ended on Sept. 28), mainly due to the government-mandated suspension of shipments to Huawei and weaker iPhone shipments. Its earnings are expected to drop 15%.

Analysts expect Qualcomm's revenue and earnings to fall 15% and 6%, respectively, this fiscal year (which ended on Sept. 30) due to slower smartphone sales and its ongoing clashes with antitrust regulators and OEMs.

However, both chipmakers should fare better in fiscal 2020, thanks to the expansion of 5G networks and easier year-over-year comparisons. Here's how those estimated growth rates compare to their forward multiples.

Source: Yahoo Finance, Nov. 2.

Based on these estimates, Qualcomm still looks like the stronger overall play than Skyworks. Qualcomm's forward dividend yield of 3.1% is also higher than Skyworks' 1.9% yield.

The winner: Qualcomm

I'm not a big fan of Qualcomm, mainly due to its seemingly endless streak of legal and regulatory problems. However, Qualcomm's better-diversified model, dominant market positions, stronger growth rates, and higher dividend clearly make it a better long-term play than Skyworks.