Please ensure Javascript is enabled for purposes of website accessibility

Skyworks Solutions Is Returning to Growth Thanks to Its 5G Mobile Business

By Nicholas Rossolillo - Jan 29, 2020 at 9:09AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

However, shares are taking a breather -- which means it’s almost time to buy again.

It took nearly two years, but Skyworks Solutions (SWKS -1.31%) stock has started to show signs of life once again. After getting hit with slumps in smartphone connectivity chip demand and fallout from the U.S.-China trade war, shares have run 74% higher since the start of 2019 -- including a nearly 50% surge since the start of the fourth quarter.

SWKS Chart

Data by YCharts

The smartphone industry has matured and is unlikely to fuel massive upside like in times past, but Skyworks is finding new momentum from the initial rollout of 5G mobile networks and the infrastructure needed to support it. Still in the early innings and helping revenue return to growth mode for the first time in a while, this chip maker still looks like a timely portfolio addition.

Sequential growth now, year-over-year growth later

Things looked ugly compared to a year ago during Skyworks' fiscal 2020 first quarter. Business is still down across the board as the company works through ongoing slowdowns in smartphone and other consumer connectivity markets. There is some collateral damage from the trade war as well as sales to Chinese tech giant Huawei are gone where there was a healthy stream of income before. That adds to the weakness that was felt in fiscal 2019, which finished with a 13% and 15% decrease in revenue and adjusted earnings, respectively.

Metric

Q1 Fiscal 2020

Q1 Fiscal 2019

Change

Revenue

$896 million

$972 million

(7.8%)

Adjusted gross profit margin 

50.1%

51%

(0.9 pp)

Adjusted operating profit margin

35.2%

36.7%

(1.5 pp)

Adjusted earnings per share

$1.68

$1.83

(8.2%)

PP = percentage point. Data source: Skyworks Solutions.  

Nevertheless, things are beginning to look up. Revenue increased 8% sequentially over the fourth quarter, and the outlook for $800 million to $820 million in second-quarter sales (usually a seasonally slow period for the company) is flat at the midpoint with the year-ago period, but it would otherwise be up by a mid-teens percentage if excluding Huawei revenue from the equation in the prior year.  

A young woman laying on the floor using a smartphone

Image source: Getty Images

Ignore the short-term noise

Management remains confident that 5G will provide a multiyear upswing for Skyworks' connectivity business, and with the movement gaining momentum, it's heartening to see the company is starting to turn a corner. However, the near-term outlook was perhaps less than what some investors were looking for -- especially given the big run-up in share price the last few months. Noise surrounding the corona virus in China (which is an important region for Skyworks) likely hasn't helped current sentiment, either. As a result, shares are down nearly 10% from recent highs.  

However, this still looks like more of a breather for the stock rather than anything to get too worked up about. If sales and earnings do begin to notch year-over-year growth, Skyworks stock could still be a bargain worth scooping up. Price to trailing 12-month free cash flow sits at 24.9, but its forward price to earnings ratio sits at only 16.8. That implies a huge rebound brewing for the bottom line.  

Of course, that rosy outlook could be derailed. The trade war is still ongoing even though a truce has recently been called, and chip demand hinges on the global economy continuing to chug along at a modest pace. Any delays in 5G network or device rollout also wouldn't be good news for Skyworks. However, with shares pulling back and the longer-term outlook for next-generation connectivity strong, Skyworks remains a good bet in my opinion and is back on my watch list after the first-quarter report.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Skyworks Solutions, Inc. Stock Quote
Skyworks Solutions, Inc.
SWKS
$92.64 (-1.31%) $-1.23

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
317%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.