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This Top Growth Stock Has Doubled Since March, and It Can Go Higher

By Harsh Chauhan - Dec 18, 2020 at 8:30AM

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Investors can still reap rich rewards from my top pick for 2020.

Skyworks Solutions ( SWKS -0.19% ) entered 2020 on its back foot thanks to the weakness in smartphone sales last year and its reliance on Huawei for a nice chunk of revenue. But the chipmaker looked like a promising bet for growth investors a year ago thanks to a potential spike in sales of 5G smartphones and its close relationship with Apple.

A year since making my recommendation, Skyworks Solutions has outperformed the broad market. What's more, the stock has more than doubled in value since hitting its 52-week low during the coronavirus-fueled crash in March.

SWKS Chart

Data by YCharts.

But investors who missed that rally need not be disappointed as the chipmaker can continue to remain a top growth stock in the new year as well.

The party is just getting started

Skyworks Solutions has finally got its act together as far as its top and bottom lines are concerned. The chipmaker reported its fiscal 2020 results in early November, and while full-year revenue remained essentially flat year over year, the company delivered a nice spike in the fiscal fourth quarter as its top line shot up 16% to $957 million, driven by an increase in demand for its 5G chips across several smartphone OEMs (original equipment manufacturers) that include Samsung, Xiaomi, Oppo, Vivo, and others.

The company now expects to deliver year-over-year revenue growth in the current quarter of 18% at the midpoint, indicating the slump that Skyworks had struggled with since the beginning of 2019 is likely over.

SWKS Revenue (TTM) Chart

Data by YCharts.

In fact, revenue growth is likely to accelerate through the course of 2021 as the demand for 5G smartphones shoots higher. Strategy Analytics estimates that sales of 5G smartphones could jump a whopping 95% in 2021 thanks to the success of devices such as the Apple iPhone 12.

Skyworks is in a great position to take advantage of this surge in 5G smartphone demand for a few simple reasons. First, the success of the iPhone 12 lineup should give the company a boost as Wedbush Securities analyst Daniel Ives estimates Apple could end up building as many as 90 million new iPhones by the end of 2020. That figure is up from his original forecast of 65 million to 70 million units.

What's more, demand for the iPhone 12 is expected to remain strong in 2021 as well. According to one estimate, the Cupertino-based company could ship nearly 230 million iPhone units next year as existing users upgrade their devices to new 5G-capable offerings.

As for Skyworks, the company stands to earn more revenue from each device. A teardown of Apple's entire iPhone 12 lineup by iFixit revealed that Skyworks supplies a bunch of chips for the new devices with a total of eight Skyworks radio frequency modules. And industry peer Qorvo recently pointed out that each 5G smartphone could carry additional radio frequency content worth $5 to $7. Of course, an overall increase in 5G smartphone sales should turn out to be a secular growth driver for Skyworks in the coming years with over one billion device shipments estimated in 2025.

As Skyworks generates nearly 70% of its revenue from selling mobile chips, this business is set to enjoy sustained growth in the next several years, helping the chipmaker boost its top and bottom lines.

Hand drawing stock chart return.

Image source: Getty Images.

It isn't too late to buy Skyworks Solutions

While Skyworks Solutions could witness multi-year growth as 5G smartphones take off, that's not the only tailwind the company is riding. Its non-mobile business has also gained impressive momentum thanks to applications in the Internet of Things, automotive industry, and industrial infrastructure.

The non-mobile businesses (known as the broad markets portfolio) recorded 30% sequential growth in the fiscal fourth quarter as well as double-digit growth over the prior-year period. Segment revenue hit a record $295 million, and Skyworks expects that strength to continue in the ongoing quarter thanks to the growth of Wi-Fi and Bluetooth connectivity solutions.

For instance, Skyworks has ramped up the sale of its Wi-Fi 6 solutions to router OEMs such as Asus and Netgear. Similarly, Amazon is using the chipmaker's 802.11ax Wi-Fi solution in its mesh Wi-Fi 6 router meant for smart homes.

Additionally, automakers such as Daimler and other Korean and Japanese OEMs are also turning to Skyworks to power their connected car solutions. This could be another long-term growth driver for the company as connected cars present another market that's expected to clock rapid growth in the coming years.

All in all, Skyworks has two growth engines, one powered by smartphones and the other by its broad markets portfolio. Growth-focused investors should always be ready to pounce when the right company presents itself, and even with these promising opportunities, Skyworks trades at just 18 times forward earnings estimates, making it a top 5G stock to buy right now.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Skyworks Solutions, Inc. Stock Quote
Skyworks Solutions, Inc.
$149.41 (-0.19%) $0.29
Apple Inc. Stock Quote
Apple Inc.
$161.84 (-1.17%) $-1.92, Inc. Stock Quote, Inc.
$3,389.79 (-1.38%) $-47.57
Daimler AG Stock Quote
Daimler AG
$24.17 (-1.10%) $0.27
Qorvo, Inc. Stock Quote
Qorvo, Inc.
$149.91 (0.49%) $0.73
Xiaomi Corporation Stock Quote
Xiaomi Corporation
$2.45 (-0.91%) $0.02

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

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