Skyworks Solutions (SWKS 1.44%) makes semiconductors and radio-frequency hardware for the wireless communications market. The launch of 5G and the rise of ubiquitous connectivity are major demand drivers for the company, which is well-positioned to benefit from these trends.
The tech stock climbed as high as $115 in early 2018, but concerns over trade wars and revenue stability drove shares down to $60 by January 2019. Namely, a ban on the sale to China's Huawei created substantial concerns, since Huawei was a major customer of Skyworks. The stock has since had a volatile year bouncing around between $95 and $65, but a recent break out of that range has seen shares leap to $101.60. The company's November 2019 full, fiscal-year earnings report helped maintain the optimism, with results that outpaced analysts' estimates.
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Investors who were considering Skyworks at $65 earlier this year are likely kicking themselves, but all the upside may well have been priced out by the recent appreciation. The company is forecasting revenue between $870 and $890 million for the first fiscal quarter of 2020, which would be a 6% sequential increase and down 9.5% year-over-year. Management is forecasting non-GAAP EPS of $1.65 for the quarter, which would be a 7.9% sequential increase and down 9.8% year-over-year.
Skyworks presents a clear opportunity and a clear risk
Company management and Skyworks bulls are focused on the company's ability to get beyond the Huawei setback and the prospects of the 5G era, which Skyworks is just starting to supply. Analysts forecast that Skyworks will supply $25 worth of materials in each 5G enabled phone, which is much higher than its $18 average for 4G devices.
Bears are concerned that explosive global smartphone growth has been achieved, and that mobile devices are now common enough that market growth will crawl along slightly faster than global populations. The company's exposure to the Chinese market continues to be a concern as well, as tensions create uncertainty about the future of commercial relationships between Chinese and American companies.
Performance and valuation metrics compare mostly favorably
Despite the difficulties endured in recent years, Skyworks enjoys some of the best margins and returns performances among semiconductor companies. Skyworks' operating margin of 28.4% and its net margin of 25.3%, are superior to the likes of NVIDIA, Broadcom, Applied Materials, and AMD. The company's 17.6% return on assets is nearly double the industry average, and its 20.8% return on invested capital is seven percentage points above average, illustrating efficiency in utilizing financial resources to deliver returns.
Skyworks' stock has a 14.75 forward price-to-earnings ratio, which compares favorably to the industry average of 20. Its EV/EBITDA at 11.7 is right around the industry median, as is its price-to-free-cash-flow at 18.1. Skyworks pays a 1.6% dividend yield, which is somewhat lower than that of Intel, Broadcom, Texas Instruments, and Qualcomm. It would appear that Skyworks is less appropriate for income investors, and much more suitable for growth investors.
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A long position in Skyworks is ultimately a bet on the growth of 5G and ubiquitous connectivity, and the company's exposure to those macro trends. It would seem that the former is likely to happen, given the commentary from major telecom providers. Skyworks' position within that framework also seems secure, but that could be subject to change over the longer term.
Components providers face a risk in that their product replacement cycle is relatively short, with each generation of chips and semiconductors having to be replaced by another that delivers efficiency gains. Thus, the demand for certain products can fluctuate rapidly, which can have disastrous consequences for capital-intensive industries like components manufacturing. Research and development expenses are also necessarily high, ongoing costs.
As long as Skyworks maintains its market position and relations between the U.S. and China remain civil, the current valuation looks like an attractive entry point. There is substantial downside risk if market conditions deteriorate, and a handful of the aforementioned stocks have similar exposures and higher earnings and dividend yields, so risk-averse or volatility-sensitive investors might be better off looking elsewhere.
