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Better Buy: Skyworks Solutions vs. Broadcom

By Leo Sun - Feb 1, 2020 at 10:44AM

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Which Apple supplier has more room to run in 2020?

Skyworks Solutions (SWKS -1.44%) and Broadcom (AVGO -0.95%) both produce chips for an increasingly connected world. Skyworks sells radio frequency (RF) chips for the mobile, automotive, broadband, wireless infrastructure, home automation, industrial, and military markets.

Broadcom sells myriad semiconductors for the data center, networking, storage solutions, broadband, wireless, and industrial markets. It also expanded its infrastructure software business by acquiring CA Technologies in 2018 and Symantec's enterprise security business in 2019.

Both companies rely heavily on Apple (AAPL -1.07%), which accounted for 51% and 20% of Skyworks' and Broadcom's revenue, respectively, in fiscal 2019. Skyworks supplies power amplifier modules (PAM) and diversity receive front-end (DRx) modules for iPhones and iPads, while Broadcom supplies Wi-Fi, Bluetooth, and RF front-end chips for the iPhone, iPad, and Apple Watch.

Network connections across a city.

Image source: Getty Images.

Skyworks' stock rallied nearly 30% over the past three years, while shares of Broadcom rose more than 50%. Let's look back at why Broadcom outperformed Skyworks, and whether or not that trend will continue in 2020.

Which company is growing faster?

Skyworks reports its revenue by region instead of product category. Last year, 55% of its revenue came from the United States, 21% came from China, 11% came from South Korea, 8% came from Taiwan, and the rest came from other countries.

Skyworks' revenue fell 13% to $3.38 billion in 2019, mainly due to slower smartphone sales and the government-mandated suspension of shipments to Chinese tech giant Huawei. Its earnings, buoyed by buybacks, only dipped 2%.

Broadcom, which was formerly known as Avago before its takeover of Broadcom in 2016, reports it revenue by both product category and region. It generated 77% of its revenue from semiconductor solutions and 23% from infrastructure software solutions last year. 67% of its sales came from the Asia-Pacific region, followed by 23% from the Americas and 10% from other markets.

Broadcom's revenue rose 8% to $22.6 billion in 2019, fueled by higher demand for its data center chips and the growth of infrastructure software business. However, its acquisitions of CA and Symantec's enterprise security unit reduced its earnings by 78%.

2019 was an unusual year for both Skyworks and Broadcom, but both chipmakers should generate more stable growth in fiscal 2020. Based on Wall Street's consensus estimates, Broadcom looks cheaper relative to its projected growth:

FY 2020 Forecast

Revenue growth

EPS growth

Forward P/E

Skyworks

4%

7%

15

Broadcom

11%

9%

12

Source: Yahoo Finance, Jan. 28.

Furthermore, Broadcom's forward dividend yield of 4% is significantly higher than Skyworks' 1.4% yield. Broadcom hiked its dividend annually for ten straight years, while Skyworks did the same for five straight years.

The tailwinds and headwinds

Apple's launch of 5G iPhones in late 2020 will be a major boon for both chipmakers. Broadcom also recently signed a new deal with Apple to provide $15 billion in wireless components over the next three years, so it won't lose its top customer anytime soon.

The iPhone 11 Pro.

Image source: Apple.

Both companies should also benefit from the deescalation of trade tensions between the U.S. and China that followed the "phase one" trade deal in January. Skyworks could start shipping more chips to Huawei and other Chinese OEMs again.

Broadcom -- which lost its bid for Qualcomm (QCOM -0.76%) due to "national security" concerns regarding its deals with Chinese companies -- might be allowed to buy American chipmakers again, since it redomiciled from Singapore to Delaware in 2018 to avoid further scrutiny from the Committee on Foreign Investment in the United States (CFIUS).

The ramp up of 5G networks should also boost demand for Skyworks' and Broadcom's chips across multiple industries, including data center operators and communications infrastructure providers.

Yet several unpredictable headwinds remain on the horizon. The Chinese economy is growing at its slowest rate in three decades, and the coronavirus crisis could throttle spending in the enterprise and consumer electronics markets. The trade war between the U.S. and China remains unresolved, and the outcome of the U.S. presidential election remains a wild card for global trade.

The winner: Broadcom

Skyworks and Broadcom face similar issues, but Broadcom is clearly the better all-around investment. It isn't as dependent on Apple, has a better diversified portfolio of chips and software, pays a higher dividend, and trades at a lower valuation.

 

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Stocks Mentioned

Skyworks Solutions, Inc. Stock Quote
Skyworks Solutions, Inc.
SWKS
$101.99 (-1.44%) $-1.49
Broadcom Limited Stock Quote
Broadcom Limited
AVGO
$582.67 (-0.95%) $-5.57
Apple Inc. Stock Quote
Apple Inc.
AAPL
$145.54 (-1.07%) $-1.57
QUALCOMM Incorporated Stock Quote
QUALCOMM Incorporated
QCOM
$133.91 (-0.76%) $-1.02

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

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