Skyworks Solutions (NASDAQ:SWKS) and Qualcomm (NASDAQ:QCOM) both provide crucial chips for connected devices. Skyworks produces power amplifiers, front-end modules, and radio frequency chips for mobile devices and wireless infrastructure equipment. Qualcomm is the world's top manufacturer of mobile baseband modems and SoCs (system on chips), and owns a massive portfolio of wireless patents.

Skyworks and Qualcomm were both rocked by COVID-19 headwinds earlier this year as the pandemic disrupted supply chains and orders. However, both stocks have since rebounded from their March lows, and they could continue rising higher on fresh tailwinds later this year. Let's see which chip stock is the better overall investment.

A 5G chipset on a circuit board.

Image source: Getty Images.

Skyworks' strengths and weaknesses

Skyworks provides a wide range of chips for the mobile, automotive, wireless infrastructure, home automation, and industrial markets. It generated 55% of its revenue from the U.S. last year, another 21% from China, 11% from South Korea, and the rest from other markets.

Skyworks' top customer is Apple (NASDAQ:AAPL), which accounted for 51% of its revenue last year. Huawei, which was cut off by the U.S. trade blacklist amid the trade war, was once another top customer which accounted for 10% of its revenue back in 2017.

Skyworks' loss of Huawei's revenue, coupled with sluggish sales of smartphones, significantly throttled its growth last year, and the COVID-19 crisis disrupted its supply chains this year. However, it offset some of those weaknesses with stronger sales of Internet of Things (IoT) and analog chips for non-smartphone markets.

Skyworks' revenue and adjusted earnings declined 13% and 15%, respectively, last year. In the first six months of fiscal 2020, its revenue fell 7% annually as its earnings dipped 8% as the aforementioned headwinds persisted.

It expects those declines to continue in the third quarter, and analysts expect its revenue and earnings to drop 7% and 9%, respectively, for the full year. However, content share gains in new 5G devices, along with sales of Apple's upcoming iPhone 12, could pave the way for a recovery next year.

Qualcomm's strengths and weaknesses

Qualcomm generated 48% of its revenue from China (including Hong Kong) last year, with the rest split between other regions. It generates most of its revenue from its QCT (chipmaking) unit, but most of its operating profits come from its higher-margin QTL (patent licensing) business, which takes a cut of each smartphone sold worldwide.

A wafer of chips being manufactured.

Image source: Getty Images.

Qualcomm's dominance of the mobile chipmaking and licensing markets has sparked a growing number of complaints, fines, and probes in recent years. Many of its customers claim its licensing fees are too high, while rival chipmakers claim Qualcomm forced them out of the market by bundling together its chips and licenses.

Apple (and its contract manufacturers), Samsung, Xiaomi, and the combined revenue of Oppo, Vivo, and their affiliates each accounted for at least 10% of its revenue last year. It still generates licensing revenue from Huawei, but only in the form of interim payments instead of per-device fees due to an unresolved dispute.

Qualcomm's adjusted revenue, which excluded a big one-time settlement from its licensing dispute with Apple, declined 14% last year as its earnings dipped 1%. In the first half of fiscal 2020, its revenue rose 5% annually but its earnings -- throttled by COVID-19 expenses and lower licensing revenue -- declined 15%.

Analysts expect Qualcomm's revenue and earnings to rise 8% and 4%, respectively, this year as the COVID-19 headwinds wane and smartphone makers purchase newer 5G chipsets.

The dividends and valuations

Skyworks pays a forward dividend yield of 1.4%. Unlike many other companies, Skyworks has no plans to cut its dividend or halt its buyback plans to conserve cash throughout the crisis.

Skyworks ended the first half of 2020 with $1.1 billion in cash and investments and no debt, and the stock trades at a reasonable 19 times forward earnings.

Qualcomm pays a forward dividend yield of 3%, and it plans to continue paying dividends and resuming the $30 billion buyback plan it launched after abandoning its bid for NXP Semiconductors two years ago.

It ended the first half of 2020 with $9.9 billion in cash, cash equivalents, and marketable securities. It was shouldering $2.5 billion in short-term debt and $13.4 billion in long-term debt -- but it can easily cover its dividend and buybacks with its free cash flow. Qualcomm currently trades at 15 times forward earnings.

The winner: Qualcomm

Skyworks likely passed a cyclical trough in 2019 and its fundamentals are improving. However, it's still too dependent on Apple, its dividend is low, and its stock isn't cheap relative to its growth.

Qualcomm has a better-diversified customer base and a wider moat, and it pays with a higher dividend at a lower valuation. Therefore, Qualcomm remains the better all-around pick in this volatile market.