Apple Supplier Skyworks Solutions Grows Sales 30% on Surging 5G Demand

Wireless connectivity chip specialist Skyworks Solutions (SWKS 1.83%) just put the wraps on its 2020 fiscal year, and it ended with a bang. Revenue increased by double-digit percentages, not just sequentially from the previous quarter during a typically busy late summer and early autumn period, but also year over year as the company starts to lap effects from the U.S.-China trade war. With lots of new 5G-enabled smartphones coming to market, I expect the company's expansion to have some legs.

Image source: Getty Images.

A great end to a difficult year and a half

Skyworks' revenue in fourth-quarter fiscal 2020 (three months ended Oct. 2, 2020) was $957 million, up 30% sequentially from the previous quarter and 16% year over year. Adjusted earnings per share increased 22% year over year to $1.85. Both metrics handily beat management's guidance just a few months prior for revenue and adjusted earnings to be at most $850 million and $1.51, respectively.

This marks a return to year-over-year growth for Skyworks after a difficult year-and-a-half stretch. Semiconductor demand is a cyclical affair, and the last downcycle was exacerbated by tense U.S.-China trade relations. In fact, Chinese tech titan Huawei was Skyworks' second-largest customer (behind Apple (AAPL 1.27%)) a couple of years ago, and sales to that customer have been all but eliminated for the time being. U.S. election results may or may not change Skyworks' relationship with Huawei, but either way, the company has clawed its way back to expansion mode. 

The reason? Lots of new smartphones featuring 5G network connectivity. Smartphone sales dropped in the spring and summer months during peak economic lockdown, but as the year wore on and 5G mobile coverage from network providers increased, phone manufacturers were in a hot hurry to include the new chips for the upcoming holiday shopping season. As a result of the uptick in demand, Skyworks ended fiscal 2020 in not-so-shabby shape. 

Data source: Skyworks Solutions.  

The 5G upgrade cycle is just getting started

Management said demand for its connectivity chips ramped higher at the end of the period thanks to 5G demand, and momentum will carry into Q1 fiscal 2021 because of Tier-1 customers (think Apple, and Alphabet's Pixel phones). With those flagship models featuring 5G connectivity only just recently being announced, sales are expected to run higher again in the next quarter. Specifically, Skyworks said to expect revenue of $1.04 billion and $1.07 billion (up at least 16% from a year ago) and adjusted earnings per share of $2.06 at the midpoint of revenue guidance (up 23%).

There is much more than just 5G under the hood, though. Skyworks is powering connectivity in other areas besides mobile phones, including 5G infrastructure equipment itself, connectivity in cars, and business and industrial equipment in need of a network connection. Some specific design wins called out from the last quarter included Facebook's new Oculus Quest 2 VR headset, next-gen WiFi 6 routers from Netgear, and new touchless point-of-sale systems at Square. 

Skyworks calls these end markets outside of smartphones its "growth markets," and said that in total, they now make up 30% of revenue and are growing by double-digit percentages. Connectivity has been in high demand for years, but as effects of the pandemic ease, many of these customers are tapping Skyworks for even more chips to enable work-from-home and play-from-home devices and equipment for businesses that help ensure social distancing and other health safety. Paired with the ongoing upgrades from 5G, Skyworks looks poised to make another run higher -- even without much in the way of revenue involving its once-sizable customer in China. 

At 29 times trailing 12-month free cash flow (basic profits measured as revenue less cash operating and capital expenses) and with $980 million in cash and equivalents and zero debt on the books, I remain bullish on this top semiconductor and 5G stock.