Skyworks Solutions (SWKS 1.81%) was hit by the weak demand for smartphones in China. Shares of the chipmaker fell 10% following the release of its fiscal 2022 second-quarter results (for the three months ending April 1, 2022) on May 3.
Though Skyworks -- which counts the likes of Apple (AAPL 0.52%), Samsung, and Xiaomi as customers -- delivered decent fiscal Q2 numbers, its outlook wasn't up to the mark, which led investors to press the panic button. However, a closer look at Skyworks' results indicates that investors may be overreacting to its guidance. Let's see why.
Skyworks Solutions' results weren't all that bad
Skyworks Solutions' revenue increased 14% year over year last quarter to a record $1.34 billion, while adjusted earnings were up 11% to $2.63 per share. The numbers were in line with Wall Street's expectations. Skyworks management credited the double-digit increases in its top and bottom lines to an increase in chip demand from top smartphone OEMs (original equipment manufacturers), as well as its efforts to diversify the customer base and reach more markets.
Skyworks' revenue from the non-smartphone business, which it classifies as broad markets revenue, was up 36% year over year last quarter to a record $523 million. So, broad markets produced 39% of the company's top line in Q2. And the terrific growth here wasn't surprising, as Skyworks is serving fast-growing markets such as the Internet of Things (IoT), industrial, automotive, and wireless connectivity.
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As it turns out, Skyworks was anticipating the broad markets business to remain flat on a sequential basis last quarter, but it turned in impressive growth thanks to the robust demand from the above-mentioned verticals. It is also worth noting that Skyworks' latest results were a big improvement over its fiscal Q1 results when its revenue was flat and earnings were down on a year-over-year basis.
Investors, however, ignored the positives from Skyworks' latest quarter and were worried about the guidance. Skyworks has guided for $1.23 billion in revenue and $2.36 per share in adjusted earnings for the fiscal third quarter, at the midpoint of its guidance range. Analysts were looking for $1.24 billion in revenue and $2.40 per share in earnings.
Skyworks is likely to lose $50 million in revenue because of supply chain disruptions and COVID-19-related lockdowns in China that are hurting demand, barring which its revenue outlook would have been stronger than expected. Market research firm IDC estimates that Chinese smartphone sales were down 14.1% in the first quarter of 2022, driven by the effect of the novel coronavirus outbreak in important cities. As China accounts for 11% of Skyworks' total revenue, it is not surprising to see why weakness in that market is weighing on the chipmaker's guidance.
But then, the guidance isn't all that bad when compared to the prior-year period. The chipmaker had reported $2.15 per share in adjusted earnings on $1.12 billion in the fiscal third quarter of 2021, which means that its top and bottom lines are on track to increase 10% each. Additionally, investors shouldn't miss the fact that Skyworks is sitting on multiple catalysts in both the smartphone and the broad markets businesses that could help accelerate its growth.
Investors need to look at the bigger picture
Skyworks Solutions' 5G wireless platform is in use by the top five smartphone OEMs, which includes flagship devices from these companies. Apple, however, is Skyworks' largest customer. The iPhone maker produced 54% of the chipmaker's revenue last quarter. More importantly, Skyworks' revenue from Apple increased 20% year over year in Q2 thanks to a combination of higher volumes and content gains.
This tight relationship with Apple bodes well for Skyworks, as the former is witnessing robust growth in the 5G smartphone era. Apple shipped 56.5 million iPhones in the first quarter of 2022, according to Canalys, which was an increase of 8% over the prior-year period. By comparison, overall smartphone shipments fell 11% during the quarter. Apple's major competitors, who are also Skyworks customers, saw a decline in shipments.
Apple has expanded its smartphone portfolio with the addition of the iPhone SE, which can help lure money-conscious customers into its fold, and is reportedly looking to introduce foldable phones in the next couple of years. Skyworks can expect more business from its largest customer thanks to these new phone models. Additionally, Apple's solid share of the 5G smartphone market can help it increase iPhone shipments substantially in the future, which would turn out to be another tailwind for Skyworks.
Thanks to these growth drivers, buying Skyworks stock right now looks like a no-brainer, as it is trading at just 12 times trailing earnings, a discount to the NASDAQ-100's multiple of 29. A forward earnings multiple of 9 points toward stronger bottom-line performance, something that Skyworks could sustain in the long run and become a top growth stock.
