The stocks for Skyworks Solutions (SWKS +0.25%) and Qorvo (QRVO 0.05%) were in fine form on the market in 2020 as sales of 5G smartphones hit critical mass and boosted interest in the two companies. But the chipmakers haven't been able to replicate their terrific stock performances so far this year.
The companies' stock has been caught up in the volatility in tech stocks in 2021. However, the price pullbacks since the end of April mean savvy investors can buy two top 5G stocks at relatively cheaper valuations.
If you had only $200 to invest, which one of these two stocks should you be buying? Let's take a closer look and see if we can find an answer.
SWKS data by YCharts
The case for Skyworks Solutions
Skyworks Solutions has been growing at a red-hot pace after the arrival of 5G smartphones. This isn't surprising as the company supplies its chips to the top 5G smartphone OEMs (original equipment manufacturers), including Apple (AAPL 0.50%), Samsung, and Xiaomi. The chipmaker gets 67% of its total revenue from the mobile segment of its business. Apple accounts for the biggest chunk of its revenue with a share of 56%.
As a result, Skyworks' fortunes have changed with the arrival of Apple's 5G-equipped iPhone 12 models, which is evident from the following chart.
SWKS Revenue (TTM) data by YCharts
Skyworks' top- and bottom-line growth started slumping from 2019 as the smartphone market stagnated. But things started looking up from the second half of 2020 once the iPhone 12 models went into production as Skyworks supplied multiple chips for Apple's latest smartphone lineup. The iPhone 12 has catapulted Apple to the top of the 5G smartphone sales rankings, and it is unlikely to lose that place anytime soon thanks to millions of users that are expected to upgrade their old devices.
So, Skyworks' fortunes are tied closely with Apple, and that's a good thing as the latter is expected to set a new sales record this year by shipping nearly 250 million smartphones. Apple suppliers have reportedly started ramping up component production for this year's iPhone already, which means that Skyworks' momentum won't be fizzling out anytime soon thanks to its largest customer.
Meanwhile, Skyworks' relationships with other smartphone OEMs mean that it is riding a secular catalyst in the form of massive growth in shipments in the coming years. IDC estimates annual 5G smartphone shipments to exceed 1 billion units by 2025 as compared to this year's estimated shipments of 540 million units. All of this indicates that Skyworks' mobile business could keep delivering impressive growth for a long time to come.
Image source: Getty Images.
However, there is more to Skyworks than just 5G. The company's Internet of Things (IoT) business registered 67% year-over-year revenue growth last quarter, outpacing the 47% gains recorded by the mobile business. The IoT business is taking advantage of several hot tech trends such as smart homes, automotive connectivity, industrial connectivity, and networking devices. Skyworks is now doubling down on this opportunity with a new acquisition, indicating that it has multiple catalysts beyond 5G that will drive growth in the long run.
The case for Qorvo
Like Skyworks, Qorvo is also a play on the 5G smartphone market. The company gets 75% of its revenue from the mobile business, which is slightly higher than Skyworks' mix. What's more, Qorvo is also a supplier of wireless chips to Apple, getting 30% of its revenue from the iPhone maker in fiscal 2021. While that's lower than Skyworks' revenue from Apple, it also means that Qorvo is a more diversified play on the 5G smartphone market.
Qorvo's chips are used by the likes of Samsung, Vivo, and Xiaomi, indicating that its customer base is identical to Skyworks. But betting on Qorvo instead of Skyworks will help investors avoid the pitfalls of investing in a company that relies too much on just one customer for a large chunk of revenue. It is worth noting that Qorvo has reduced its reliance on Apple from 33% of total revenue in fiscal 2020.
As a result, Qorvo may be in a better position to take advantage of the growth in the 5G smartphone market as its revenue is distributed among a wider customer base. Another good thing about Qorvo is that it isn't just reliant on smartphones to take advantage of the 5G market. The chipmaker is supporting the rollout of 5G infrastructure by supplying chips for massive MIMO (multiple-input and multiple-output) deployments across the globe.
Qorvo CEO Robert Bruggeworth pointed out on the latest earnings conference call:
In infrastructure, we continue to ramp shipments during the quarter to a base station OEM in support of U.S. C-band massive MIMO deployments. And we captured initial design wins for massive MIMO deployments in Canada, Japan and Korea.
According to third-party estimates, the massive MIMO market is expected to clock a compound annual growth rate (CAGR) of 35% through 2027. More specifically, deployments of 5G massive MIMO are expected to clock a CAGR of 44% over the same period thanks to their ability to improve network throughput and capacity. So, Qorvo's infrastructure and defense products (IDP) business, which accounts for 25% of the total revenue, also stands to win big from 5G.
The IDP business recorded 38% revenue growth last fiscal year. It won't be surprising to see it sustain such impressive growth over the long run given the end-market opportunity at hand.
The verdict
Both Skyworks and Qorvo are well-placed to take advantage of the 5G smartphone market. Qorvo's advantage is that the company is a more diversified bet as compared to Skyworks. But at the same time, Skyworks also has multiple catalysts powering its growth. So, choosing one stock over the other doesn't look like an easy thing to do as they appear to be similar in a few respects.
However, Qorvo has a slight edge over Skyworks from a valuation perspective. Qorvo trades at 14 times forward earnings, making it slightly cheaper than Skyworks that has a forward earnings multiple of nearly 16. Additionally, Qorvo's price-to-sales ratio of 5.2 is lower than Skyworks' multiple of 6.5. Given that both companies are expected to clock identical annual earnings growth over the next five years, Qorvo seems to have the edge over Skyworks for anyone with $200 looking to buy a 5G stock.
