The smartphone market turned around in the fourth quarter of 2020 and ended a difficult year on a high. IDC estimates that smartphone shipments jumped 4.3% year-over-year last quarter to 385.9 million units, paving the way for a strong recovery in 2021 after a 5.9% decline in shipments last year.
Skyworks Solutions (SWKS 2.08%) and Micron Technology (MU 2.20%) are two stocks that are already taking advantage of this turnaround, as they manufacture chips that go into 5G (fifth-generation) smartphones. Skyworks is witnessing tremendous growth in its mobile business, while Micron is about to join the party as well. These factors have contributed to a strong start on the market this year.
These chipmakers are unlikely to lose their impressive stock market momentum in the coming months, as 5G smartphone sales are expected to switch into a higher gear in 2021. Gartner forecasts that global 5G smartphone shipments could jump to nearly 539 million units this year and account for 35% of the overall market. This would be a huge jump over last year's 5G smartphone shipments of 213 million units, and pave the way for stronger growth in Skyworks and Micron's mobile businesses in 2021.
Image source: Getty Images
1. Skyworks Solutions' mobile business is on a roll
Skyworks' mobile business is its biggest source of revenue, accounting for 78% of its top line last quarter. Skyworks' mobile revenue shot up 81% year-over-year in the first quarter of fiscal 2021, which ended on Jan. 1, 2021, to $1.18 billion. Apple (AAPL 0.51%) -- Skyworks' largest customer, generating 56% of total revenue -- hit gold with its latest flagship devices, and that sent the chipmaker's mobile business soaring.
The Apple catalyst is here to stay for Skyworks for the remainder of the year, for a couple of reasons. First, Apple is expected to remain a top 5G smartphone supplier in 2021 thanks to a large base of users in an upgrade window. Apple's well-priced iPhone 12 lineup and the possibility of an entry-level device supporting the latest wireless standard could help the smartphone giant record strong shipment gains in 2021.
Second, Skyworks is a key Apple supplier. It reportedly supplies as many as eight radio-frequency (RF) modules for the iPhone 12, so Skyworks could see a nice spike in volumes and gain more revenue per iPhone, especially as 5G chips are more expensive than their 4G predecessors.
Throw in the fact that Skyworks has started ramping up shipments of its 5G chips to other smartphone OEMs (original equipment manufacturers) such as Vivo, Oppo, Samsung, and Xiaomi, and it becomes easier to see why its mobile business could continue clocking high growth rates. And Skyworks' non-mobile business (better known as the broad markets portfolio) is also benefiting from the 5G rollout.
The company's broad markets revenue shot up 35% year-over-year during the quarter as demand for its connectivity solutions supporting 5G infrastructure remained strong. Skyworks recently pointed out that it has shipped more than a million of its 5G small-cell power amplifiers, which help telecom carriers boost network speed.
The company also says that the 5G small-cell market still has a lot of room to grow. It could be worth $8.3 billion by 2027, clocking a compound annual growth rate of 43% in the coming years.
Thanks to such impressive catalysts, it isn't surprising to see that Skyworks' top and bottom lines are expected to take off this fiscal year. And it isn't too late for investors to jump onto this bandwagon, as this top 5G stock trades at an attractive 21 times forward earnings.
2. Micron Technology's mobile business is about to step on the gas
Micron Technology's mobile business unit delivered $1.5 billion in revenue in the first quarter of fiscal 2021, which ended on Dec. 3, 2020. The segment's revenue increased 3% year-over-year, accounting for nearly 26% of total revenue. Though Micron's mobile growth wasn't as spectacular as Skyworks', management pointed out that mobile "demand remains strong as 5G momentum increases and the mobile market recovers from the impact of the pandemic."
Mobile accounts for 40% of the overall DRAM market, according to a third-party estimate, and manufacturers such as Micron are reportedly allocating more capacity toward the production of mobile DRAM to meet the recent surge in demand. In fact, demand seems to be so strong that mobile DRAM orders placed in the fourth quarter of 2020 are expected to be fulfilled only in the current quarter.
This tight supply of DRAM should ideally result in improved pricing. Industry data supports that: The spot price of the 8 GB DDR4 DRAM jumped to $3.93 earlier in February, a sharp jump over the spot price of $2.54 seen in August 2020.
More importantly, mobile DRAM demand should remain strong, as 5G smartphones are being equipped with more memory than their 4G predecessors. This bodes well for Micron, as it reportedly controls 20% of the mobile DRAM market. What's more, the company is trying to grab even more of this space with specialized 5G memory chips that help reduce space and power consumption while delivering faster performance.
So a mix of higher pricing and improved shipment volumes will be a tailwind for Micron's mobile business this year. More importantly, the mobile DRAM market presents a long-term growth opportunity for Micron given its solid market share in this space. The global mobile DRAM market's revenue is expected to jump from an estimated $19.5 billion last year to $35.6 billion in 2027, according to a third-party estimate.
Thrown other catalysts such as data centers, consoles, and personal computers into the mix, and it isn't too difficult to see why Micron's earnings are expected to grow at a fast clip over the next couple of years.
MU EPS Estimates for Next Fiscal Year data by YCharts
That's why investors looking to buy a diversified company to take advantage of the growing adoption of 5G smartphones might want to consider Micron Technology, as it has multiple businesses driving its growth. What's more, Micron is trading at less than 22 times forward earnings, so it isn't too late to buy this growth stock -- it has room for more upside thanks to catalysts such as 5G smartphones.
