Despite significant tailwinds in the company's favor, Skyworks Solutions (SWKS 1.81%) investors have only lost money in the stock over the last two years. Moreover, with prominent economic experts predicting a worldwide recession, you might wonder if now is the time to invest in a company that has underperformed the semiconductor industry and the S&P 500 over the last year.
Here are two reasons Skyworks Solutions is due to outperform.
Image source: Getty Images.
1. Apple's upgrade cycle drives Skyworks' results
Since Apple (AAPL 0.52%) makes up 55% of Skyworks' business, it generally means that how Apple's business goes, so goes Skyworks. Consequently, many analysts and investors have learned to read Apple's press clippings for leading indicators of what's coming down the road for Skyworks.
Fortunately for Skyworks, it looks like it will have favorable Apple tailwinds over the back half of 2022.
Numerous media outlets have reported that the new iPhone 14 will be revealed sometime in September, and pre-orders should occur shortly after that. Historically, new iPhone releases boost Skyworks results. And you can see the iPhone 14 uplift in Skyworks guidance for the September 2022 quarter, where Chief Financial Officer Kris Sennesael forecasted sequential revenue and non-GAAP (generally accepted accounting principles) diluted earnings-per-share growth of 14% and 19%, respectively. Additionally, Sennesael announced an 11% dividend increase from the prior quarter -- showing confidence in the company's future cash flow generation.
2. Tailwinds from 5G and increasing wireless device usage
Since Skyworks produces its best results in the September and December quarters and weakest results in the March and June quarters, trailing-12-month (TTM) numbers are the best gauge of its performance, as TTM eliminates the effects of seasonality. And one significant observation should stick out when an astute investor uses TTM to measure the company's growth, free cash flow (FCF), and net income over the last five years and compares it to the evolution of 5G wireless devices.
SWKS Revenue (TTM) data by YCharts.
In 2018, before the wireless industry introduced 5G, the global smartphone market shrank for the first time and went into the doldrums for two years. In addition, you can see on the chart above that Skyworks essentially flatlined during the same period. Only after 5G smartphone production started ramping up across 2020 did the smartphone market return to growth in the fourth quarter of that year. As a result, Skyworks' revenues, net income, and FCF turned sharply up near the end of 2020 -- denoting the link between the company's results and the growth of 5G devices.
Terrible economic conditions have temporarily stunted smartphone growth
However, the pandemic and the ensuing supply chain disruptions have restrained smartphone growth in late 2021 and the first half of 2022 -- which you can see by Skyworks revenues, FCF, and net income subsequently stalling.
SWKS Free Cash Flow data by YCharts.
Apple, the most significant smartphone manufacturer, has noted in a recent earnings report that it is not immune to COVID-driven supply chain disruptions and chip shortages. For example, in its September 2021 results, Apple reported losing approximately $6 billion in revenues due to supply chain constraints. And if Apple is encountering pain, Skyworks' other smartphone manufacturer customers like Samsung are likely dealing with similar problems. All bad news for Skyworks and a prime reason the stock is down 26% year to date.
Additionally, a global recession could stall smartphone growth even if the wireless industry solves its supply chain problems, and Skyworks' stock could remain moribund. Of course, a recession is an unavoidable risk that would be terrible for all companies. However, should the economy enter a recession, Skyworks has the financial health to survive a downturn and thrive as the economy eventually rebounds.
On the positive side, Apple's June quarter results suggest that its supply chain difficulties are already easing. And with industry experts predicting that the global supply chain chip shortage will soon end, the smartphone market could reaccelerate, resulting in a quick rebound of Skyworks' stock.
Skyworks today trades at a price-to-earnings (P/E) ratio of 13.4, below its median P/E valuation of 19.68 over the past 13 years. This valuation is also undervalued compared to the S&P 500 P/E ratio of 21.6. This terrible economic environment has opened an opportunity to invest in a great company when it is down. Therefore, if you are looking for a growth company well positioned to succeed in the post-pandemic era, few companies are as good an investment as Skyworks.
