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Better Buy: Skyworks Solutions vs. Broadcom

By Leo Sun - Jan 30, 2021 at 6:15AM

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Which Apple supplier will be the safer investment this year?

Skyworks Solutions (SWKS -1.64%) and Broadcom (AVGO -1.64%) are both diversified chipmakers that are tightly tethered to Apple (AAPL 1.62%). Skyworks generated 56% of its revenue from Apple in fiscal 2020, while Broadcom relied on the tech giant for 15% of its sales last year.

Skyworks produces wireless chips for the mobile, automotive, industrial, and Internet of Things markets. Broadcom also sells wireless chips for a wide range of industries, and it expanded into the infrastructure software market over the past two years by buying CA Technologies and Symantec's enterprise security unit.

I compared these two stocks last September and declared that Broadcom's lower dependence on Apple, cheaper valuation, and higher dividend made it a better buy than Skyworks. Since then, Broadcom's stock price has rallied about 20% as Skyworks' stock price advanced just over 10%. But will my thesis hold up throughout the rest of 2021?

Let's take a fresh look at both chipmakers to see if Broadcom is still the better buy.

Wireless connections across a city.

Image source: Getty Images.

Which chipmaker is growing faster?

Skyworks and Broadcom have both experienced decelerating sales growth over the past three years, but Broadcom has remained more resilient:

Revenue Growth (YOY)

2018

2019

2020

Skyworks

6%

(13%)

(1%)

Broadcom

18%

8%

6%

Source: Annual reports. YOY = Year over year.

Skyworks' revenue declined in 2019 as sluggish sales of smartphones, including its loss of orders from the blacklisted tech giant Huawei, offset its stronger sales of IoT and analog chips for other markets.

Some of those headwinds waned in 2020, but COVID-19 disruptions throttled its recovery in the first half of the year. However, its revenue finally rose year over year in the fourth quarter as orders for its Sky5 5G chips accelerated.

Skyworks expects its content share gains in 5G devices, especially Apple's iPhone 12, and the recovery of the automotive and industrial markets to boost its sales in fiscal 2021. Analysts expect its revenue to rise 18% this year and another 10% in fiscal 2022.

An artist's conception of a 5G chip.

Image source: Getty Images.

Broadcom's chip sales surged in 2018, fueled by robust demand from cloud and data center customers. It faced tougher comparisons in 2019 as those upgrades cooled and smartphone sales slowed down, but its growing infrastructure software business cushioned that blow.

Broadcom's chip sales -- especially to networking, auto, and industrial customers -- dipped in 2020 as the COVID-19 crisis disrupted its supply chains. However, its chip sales gradually stabilized, and in the second half of the year as carriers and cloud customers upgraded their networks to address the rising bandwidth needs of remote work and stay-at-home activities. Its auto and industrial customers also came back online.

Meanwhile, the stable growth of Broadcom's infrastructure software business offset the temporary weakness of its chipmaking business. Analysts expect that ongoing recovery, along with strong sales of 5G devices, to boost its revenue by 10% this year and another 4% in 2022.

Which company is more profitable?

Broadcom's superior revenue growth enabled it to generate stronger earnings growth than Skyworks over the past three years:

EPS Growth (YOY)

2018

2019

2020

Skyworks

12%

(15%)

(1%)

Broadcom

30%

2%

4%

Source: Annual reports. YOY = Year over year. Non-GAAP.

Analysts expect Skyworks' earnings to rise 24% in 2021 and another 15% in 2022, which are impressive growth rates for a stock that trades at just 18 times forward earnings. Skyworks pays a forward dividend yield of 1.2%, and it's raised that payout annually for six straight years.

Broadcom's earnings are expected to climb 18% in 2021 and 7% in 2022. Those are also solid growth rates compared to its forward P/E ratio of 16. It pays a much higher forward yield of 3.1%, and it's raised its payout annually for nine straight years.

Why I'm sticking with Broadcom

Skyworks still has lots of growth potential, especially as it diversifies its core business away from smartphones and notches content share gains across other connected devices. However, its overwhelming dependence on Apple troubles me, especially since Apple has been gradually replacing third-party chips with its own silicon.

Therefore, Broadcom's lower valuation, higher yield, and better-diversified business still make it a more attractive investment than Skyworks for 2021.

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Stocks Mentioned

Broadcom Limited Stock Quote
Broadcom Limited
AVGO
$477.84 (-1.64%) $-7.97
Apple Inc. Stock Quote
Apple Inc.
AAPL
$138.93 (1.62%) $2.21
Skyworks Solutions, Inc. Stock Quote
Skyworks Solutions, Inc.
SWKS
$91.12 (-1.64%) $-1.52

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

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