Skyworks Solutions (SWKS -1.39%) and Qorvo (QRVO -2.04%) have a lot in common. Both companies make chips that are used for RF (radio frequency) and mobile applications, rely on the same company for a major chunk of their revenue, and are poised to benefit from a similar catalyst.
That's the reason both stocks were the subject of twin upgrades by BofA. The investment bank recently upgraded Skyworks and Qorvo stocks to "buy" from its prior rating of "underperform." This wasn't the first time that Skyworks and Qorvo were upgraded together by analysts. In October, Cowen analysts had done something similar and upgraded both stocks.
These analyst actions seem to suggest that it would be a good idea to buy both Skyworks and Qorvo, as they could turn out to be growth stocks next year. But doing so would expose an investor to identical risks. If something goes wrong, there's a good chance that both these chip stocks might take a beating. So, if you had to choose between Skyworks and Qorvo, which one should you go for? Let's find out.
Which is the better 5G mobile play?
The common theme among the recent upgrades that Skyworks and Qorvo have received is that they stand to gain from their relationship with Apple (AAPL -0.03%) and the deployment of 5G (fifth-generation) smartphones next year. According to Bloomberg data, Apple supplies 32% of Qorvo's revenue. Meanwhile, Skyworks gets 51% of its total revenue from Apple by supplying chips for the iPhone.
BofA analyst Vivek Arya estimates that the likes of Skyworks and Qorvo could enjoy "material upside" thanks to 5G adoption as they supply RF technology. That's because the demand for RF chips could jump from $12.6 billion this year to $18.5 billion over the next three years, according to Arya. So, both Skyworks and Qorvo are sitting on a big opportunity to grow their sales.
However, Apple's potential domination of the 5G smartphone market next year could give Skyworks an edge as it gets a greater proportion of its top line from the iPhone maker. Nikkei Asian Review reports that Apple is projecting sales of 80 million 5G phones next year as it is gearing up to launch three 5G-enabled models.
IDC estimates that total 5G smartphone shipments could hit 123.5 million units next year, indicating that Apple could end up dominating this space. Apple's 5G dominance could drive bigger growth for Skyworks given the former's influence over its revenue.
Moreover, Skyworks is expected to be the biggest beneficiary of Apple's 5G iPhones, according to Raymond James analyst Chris Caso. According to Caso, Skyworks will face "limited competitive pressure" in 2020, which should see it take advantage of an increase in both volumes and content. This indicates that Qorvo's 5G content in next year's iPhones might not be as attractive as Skyworks'.
Apart from Apple, both Skyworks and Qorvo are trying to tap Chinese smartphone OEMs (original equipment manufacturers). Skyworks said on its latest earnings conference call that it is working with Vivo, OPPO, and Xiaomi on their 5G handsets. On the other hand, Qorvo said that it is witnessing "a significant increase in design activity on 5G with our Chinese customers."
So, both the chipmakers are setting themselves up to take advantage of the 5G smartphone market, but there's a chance that Skyworks might enjoy the upper hand over here thanks to Apple.
Looking past mobile
Skyworks and Qorvo also stand to gain from 5G beyond mobile. Skyworks' broad markets business -- which now accounts for a third of the total revenue -- will be a beneficiary of the 5G rollout on the infrastructure side.
For instance, Skyworks also deploys small cell solutions that will come in handy during the roll-out of 5G. That's because small cells will allow telecom carriers to boost the capacity of their networks and handle high data volumes. This is the reason why the small cell market is expected to clock an annual growth rate of 32% through 2024, according to Mordor Intelligence.
This opens up an opportunity for Skyworks to benefit from the 5G changes beyond just smartphones.
Qorvo, on the other hand, can also take advantage of 5G infrastructure deployments thanks to its gallium nitride (GaN) technology. GaN is used in 5G base stations to make them more efficient and reliable. Not surprisingly, demand for GaN chips is expected to clock an impressive compound annual growth rate of 23% through 2024.
In the end, it can be said that both Skyworks and Qorvo have a bunch of identical catalysts in the 5G market. But there are three points that make one better than the other.
The first is Skyworks' major reliance on Apple, as I have already explained earlier in the article how that might help it over Qorvo. The second is that Skyworks has a bigger non-mobile business as compared to Qorvo. This gives the former more room to take advantage of 5G infrastructure growth.
Finally, buying Skyworks Solutions stock right now seems to be the logical bet given its valuation. Skyworks' trailing price-to-earnings (P/E) ratio of almost 23 is significantly lower than Qorvo's multiple of 55. This makes it easier for investors to choose one over the other, as Skyworks stock seems more value for money over Qorvo, especially considering the identical opportunities they enjoy.