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Better Buy: Micron Technology vs. Skyworks Solutions

By Leo Sun - Mar 24, 2020 at 9:46AM

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Which components maker will bounce back faster from the adverse effects of the COVID-19 crisis?

Micron Technology (MU 1.13%) and Skyworks Solutions (SWKS 1.79%) both provide crucial components for electronics manufacturers. Micron is one of the world's largest memory chip manufacturers, and Skyworks produces a wide range of wireless chips.

Both stocks have tumbled nearly 40% over the past month as the novel coronavirus (COVID-19) pandemic disrupted supply chains and purchases worldwide. Things could get much worse before they get better, but which tech stock will rebound more quickly after the crisis ends? Let's take a closer look and see which is the better buy right now.

How do Micron and Skyworks make money?

Micron is the world's third-largest DRAM manufacturer and fourth-largest NAND manufacturer. It generated 67% of its revenue from DRAM chips, 28% of NAND chips, and the rest from other types of memory chips last quarter. Micron's biggest competitor is Samsung, which leads the DRAM and NAND markets.

A stick of DRAM memory.

Image source: Getty Images.

Skyworks mainly sells radio frequency (RF) chips for the mobile, automotive, broadband, wireless infrastructure, home automation, industrial, and military markets. Skyworks' top customer is Apple (AAPL 0.96%), which accounted for a whopping 51% of its revenue last year.

How fast are Micron and Skyworks growing?

Micron is a cyclical stock that relies heavily on stable memory chip prices. A chip shortage lifted prices to multi-year highs in 2017 and 2018, but a supply glut (amid sluggish demand from the mobile and PC markets) caused a steep decline in 2019.

Skyworks also sells its chips to cyclical industries, but its massive exposure to Apple pins its performance directly to the iPhone maker. That's why Apple's decision to pull its second-quarter guidance in February on coronavirus concerns also skewered Skyworks' stock. In short, both companies struggled to grow their revenue last year.

Revenue growth

2015

2016

2017

2018

2019

Micron

(1%)

(23%)

64%

50%

(23%)

Skyworks

42%

1%

11%

6%

(13%)

Source: Company quarterly reports.

Micron's revenue fell 35% annually in the first quarter of 2020, but it forecast a milder decline of 18%-23% in the second quarter. Analysts expected its revenue to drop 13% in 2020 before rebounding in 2021.

Those projections don't fully account for the impact of the coronavirus outbreak, but Micron hasn't altered its guidance yet. Moreover, memory prices are still expected to rise this year as chipmakers produce fewer chips. Micron's upcoming second-quarter report on March 25 might shed more light on the situation.

Skyworks' revenue fell 8% annually in the first quarter of 2020, and it originally anticipated roughly flat growth in the second quarter. But in early March, it reduced that guidance to a 5%-6% decline, citing disruptions of global supply chains.

Analysts previously expected its full-year revenue to stay flat this year before rising in 2021, but those estimates could be reduced after its second-quarter report in early May.

Profitability and valuations

Micron and Skyworks are both consistently profitable, but neither company reported impressive earnings growth in 2019.

Micron's net income declined by 55% last year. Wall Street anticipates a steeper 64% decline this year, followed by triple-digit growth in 2021. Skyworks' net income dipped 7% last year, and analysts expect 1% growth this year followed by 21% growth in 2021. Assuming those estimates remain unchanged, Micron trades at 18 times forward earnings, and Skyworks has a forward P/E ratio of 13.

For now, investors seem more willing to pay a premium for Micron because it doesn't face customer concentration issues like Skyworks, and memory chip prices should continue rising throughout the coronavirus crisis. In fact, a surge in remote work could boost sales of PCs, peripherals, and mobile devices, which would throttle supplies again and boost DRAM and NAND prices. Skyworks doesn't have that luxury since most of its chips are heavily commoditized.

The clear winner: Micron

Micron and Skyworks could both stumble further in this ugly market, but Micron should recover faster. Demand for memory chips could soften as the coronavirus crisis worsens, but higher prices could offset those lower shipments.

Skyworks remains tethered to Apple, which could face tough production bottlenecks and lower demand for its new iPhones as the pandemic rages on. Demand from its other end markets could also dry up and reduce its pricing power. Both stocks should eventually recover after the pandemic ends, but Micron is clearly the better buy at current levels.

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Stocks Mentioned

Micron Technology, Inc. Stock Quote
Micron Technology, Inc.
MU
$57.37 (1.13%) $0.64
Skyworks Solutions, Inc. Stock Quote
Skyworks Solutions, Inc.
SWKS
$95.53 (1.79%) $1.68
Apple Inc. Stock Quote
Apple Inc.
AAPL
$142.92 (0.96%) $1.36

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

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