Skyworks Solutions (SWKS -2.65%) and Broadcom (AVGO -2.07%) both produce a wide range of semiconductors for various industries. Skyworks mainly sells radio frequency chips for the mobile, automotive, wireless infrastructure, home automation, and industrial markets.
Broadcom sells chips to the data center, networking, storage solutions, broadband, wireless, and industrial markets. It also expanded into the infrastructure software market with its acquisitions of CA Technologies in 2018 and Symantec's security business in 2019.
Skyworks and Broadcom aren't direct competitors, but both companies are heavily dependent on Apple (AAPL -1.76%). Skyworks generated 51% of its revenue from Apple in fiscal 2019, while Broadcom relied on the iPhone maker for 20% of its sales last year.
I compared these two chipmakers back in February, and concluded that Broadcom's better-diversified portfolio, lower dependence on Apple, higher dividend, and lower valuation all made it a better all-around investment than Skyworks. Since I wrote that article, Skyworks' stock rose about 25% as Broadcom's stock climbed 20%.
That gap isn't significant, but it's enough to warrant a fresh comparison of both stocks. Let's see if I was wrong about Skyworks, and whether or not it's becoming a better investment than Broadcom.
Skyworks' strengths and weaknesses
Skyworks' revenue and adjusted earnings fell 13% and 15%, respectively, in fiscal 2019, due to sluggish smartphone sales and its loss of orders from Huawei, which accounted for over 10% of its sales, after the U.S. blacklisted the Chinese tech giant. It partly offset that slowdown with stronger sales of IoT (Internet of Things) and analog chips for non-smartphone markets.
In the first nine months of 2020, Skyworks' revenue declined 6% year-over-year as the COVID-19 crisis disrupted supply chains across the world. But excluding the loss of Huawei, its revenue would have improved year-over-year in the second and third quarters. Its adjusted earnings declined 6% as COVID-19 costs weighed down its margins during the period.
For the fourth quarter, Skyworks expects to post "double-digit sequential revenue and earnings-per-share growth," but both figures will still likely decline from the previous year. It didn't provide any top-line guidance, but the midpoint of its EPS guidance calls for a year-over-year dip of 1%.
Analysts expect Skyworks' revenue and earnings to decline 4% and 6%, respectively, for the full year. But next year, they anticipate 12% revenue growth and 19% earnings growth as the pandemic passes, automakers come back online, and new 5G devices (including Apple's new iPhones) hit the market.
In a recent investor presentation, Skyworks predicted that front-end chip revenue would rise to $25 per 5G smartphone -- up from $18 per 4G device and $8 per 3G device. It also expects content share gains in connected and autonomous cars to generate long-term tailwinds.
Broadcom's strengths and weaknesses
Broadcom's revenue grew 8% in fiscal 2019, thanks to strong sales of its data center chips and the growth of its infrastructure software business. Its adjusted EPS rose 2%. In the first three quarters of 2020, Broadcom's revenue rose 4% year-over-year, as the strength of its expanded infrastructure software unit offset the pandemic-induced disruptions of its semiconductor business.
Demand for its networking and broadband chips also stabilized on a sequential basis in the second and third quarters as cloud and telco customers upgraded their infrastructure to address remote work and stay-at-home measures. Its total semiconductor revenue also grew sequentially in the third quarter.
Broadcom's adjusted EPS dipped 1% during the first nine months, as expenses from Symantec's security business throttled its operating margins in the first half of the year. But Broadcom expects those costs to fade away by the end of the year, and its operating margins expanded year-over-year in the third quarter.
Broadcom expects its fourth-quarter revenue to rise 11% year-over-year at the midpoint, and for its adjusted EBITDA to grow 18% on the same basis. Analysts expect its revenue and earnings to rise 6% and 3%, respectively, this year.
For fiscal 2021, analysts expect Broadcom's revenue and earnings to rise 9% and 16%, respectively, as customers ramp up their 5G device and infrastructure upgrades. Its new $15 billion deal with Apple, which it signed in January to secure chip orders for the next three and a half years, will also likely amplify those gains.
Why I'm still voting for Broadcom
Skyworks will likely generate stronger growth in 2021, it's reasonably valued at 19 times forward earnings, and it pays a decent forward yield of 1.5%. However, Broadcom trades at just 14 times forward earnings, it pays a much higher forward yield of 3.6%, and it doesn't generate half its revenue from a single customer. I believe those strengths still make Broadcom a better all-around investment than Skyworks in this frothy and wobbly market.