Huawei is once again at the center of a storm brewing between the U.S. and China. Last year, the Department of Commerce added the Chinese telecom giant to the "Entity List," restricting exports of hardware and software to Huawei by American corporations.
And now, Taiwan Semiconductor Manufacturing has reportedly stopped taking orders from the embattled Chinese company. This development comes after the U.S. tightened export controls that now require all foreign chipmakers using American equipment, software, or intellectual property to apply for a license before selling to Huawei.
This development comes at a bad time for mobile chipmakers such as Taiwan Semiconductor, as the smartphone market has taken a significant hit thanks to the novel coronavirus pandemic. The outbreak of COVID-19 has disrupted both sales and supply chains. The latest Commerce Department notification is another headwind for suppliers as Huawei is one of the leading lights of the 5G smartphone space and losing it as a customer is a hit.
Skyworks Solutions is moving beyond Huawei
Huawei's addition to the Entity List last year had wrecked Skyworks' momentum as it had relied on the Chinese giant for 12% of its revenue. Skyworks pointed out that its second-quarter revenue would have increased 4% year-over-year, but disruptions with Huawei led to a 5% decline. The good part is that Skyworks' dependency on Huawei has declined since last year.
Responding to an analyst's query during the latest earnings conference call on May 4, Skyworks CFO Kris Sennesael said that the company's "business with Huawei remains at a much lower level than it was historically." Skyworks didn't point out the exact percentage of revenue it now gets from Huawei, however, the company said that its mobile revenue would have increased by 9% to 10% year over year excluding Huawei-related business in the second quarter of fiscal 2020 and the prior-year period.
With Huawei-related business included, Skyworks' mobile revenue was flat year-over-year as content gains in 5G smartphones were offset by the loss of business at Huawei. So, Skyworks' mobile business is holding its ground despite the negative impact of Huawei restrictions. This also indicates that if the chipmaker were to lose the Huawei business as a whole, its mobile business (accounting for 70% of the total revenue) would still be able to deliver growth as the company is looking to win business at other manufacturers.
Skyworks is busy expanding its presence with other Chinese smartphone OEMs (original equipment manufacturers) such as Oppo, Vivo, and Xiaomi. These three companies have already made their mark in the 5G smartphone market in the first quarter of 2020, accounting for just over 27% of the total shipments of 24.1 million, according to Strategy Analytics.
So it won't be surprising to see Skyworks making up for the loss of Huawei business. The chipmaker is also supplying 5G chips to Samsung's current flagship device. This is another positive for Skyworks, as Samsung leads the 5G smartphone space with a market share of just over 34%.
Finally, Skyworks' largest customer, Apple, which accounts for around half of its total revenue, is prepping to launch a range of 5G smartphones later this year. As such, it becomes easier to see why the chipmaker can overcome the loss of Huawei and remain a top 5G stock.
Qorvo enjoys similar tailwinds
There are quite a few similarities between Skyworks and Qorvo. Like Skyworks, Apple is Qorvo's biggest customer, supplying 30% of total revenue. Qorvo is also supplying 5G chips to Samsung, Xiaomi, and Vivo.
More importantly, Qorvo has reduced its reliance on Huawei by a substantial margin over the past year. The Chinese telecom giant supplied 15% of Qorvo's total revenue at the end of fiscal 2019. On the latest earnings conference call, Qorvo pointed out that Huawei is expected to account for less than 5% of the chipmaker's revenue this quarter.
So, just like Skyworks, Qorvo doesn't stand to lose much if it were to lose its entire Huawei business. Moreover, Qorvo has another avenue to offset any such loss -- the 5G infrastructure market.
Qorvo's infrastructure and defense products (IDP) business delivered sequential revenue growth in the March-ended quarter, accounting for nearly 30% of the total revenue. Management credited the division's quarter-over-quarter growth to an increase in demand for 5G infrastructure and the ramp-up of the Wi-Fi 6 standard to support faster connectivity.
Qorvo expects demand from these two areas to keep growing in the current quarter and these are going to be long-term catalysts for the company. ABI Research estimates that Wi-Fi 6 devices will account for half of the Wi-Fi consumer equipment device market by 2024.
The latest Wi-Fi standard is currently in its early stages of deployment, but there's a tremendous opportunity, as the total number of Wi-Fi consumer equipment devices is expected to go up to 254 million in 2024, from 221 million last year.
Global 5G infrastructure spending is expected to jump substantially in the coming years. According to Gartner, global 5G infrastructure spending hit an estimated $2.2 billion last year. That figure is expected to jump to $4.18 billion this year and $6.8 billion in 2021. As a result, demand for Qorvo's GaN (gallium nitride) semiconductor devices that improve the efficiency and performance of a 5G base station should increase.
As such, the long-term picture for both Qorvo and Skyworks Solutions seems clear despite the short-term challenges that COVID-19 and the new restrictions on Huawei pose. The chipmakers don't depend much on Huawei now, and they are on the cusp of a generational shift in the smartphone space thanks to the advent of 5G. These catalysts should help these semiconductor stocks deliver impressive growth in the long run.