Radiofrequency (RF) device company Skyworks Solutions (SWKS -1.55%) stock price has declined since the second half of 2021 despite having significant growth tailwinds from mobile device migration from 4G to 5G. One of the reasons for its stock decline is that the company faces a serious risk to its business that long-term investors might want to consider before investing.
Here is one significant risk that this company could face by 2030.
Customer concentration presents a significant risk
For much of Skyworks' history, one customer, Apple, has accounted for a weighty chunk of Skyworks' revenues. Over the last ten years, Apple grew from 29% of its total revenue to 55%. And while riding on the back of the most important global smartphone manufacturer has produced dividends for Skyworks, it also comes with a substantial risk -- Apple has plans to eventually manufacture for itself all the critical components used within its products.
Although Apple is unlikely to replace Skyworks' 5G business soon, it appears Apple is targeting the next generation of wireless technology by announcing job openings for wireless engineers for 6G. Additionally, in December of 2021, Apple announced it was building a new office in Irvine, California, focusing on wireless chip production, according to a Bloomberg article. This new office will, maybe not so coincidentally, be in the same city where Skyworks has its headquarters -- a prime area from which it can drain talent away from Skyworks.
At one point, Skyworks' valuation traded roughly in line with Apple. However, this chart shows that the relationship has decoupled over the last several years as the market absorbs the possibility of Skyworks losing half of its sales.
SWKS PE Ratio data by YCharts
Skyworks counts on markets outside mobile phones to diversify
Skyworks first started addressing Apple concentration issues by diversifying into China. By 2019, China-based Huawei was its second-largest customer and had reached a 15% share of its revenue. However, Skyworks' ability to diversify into China was nipped in the bud once the U.S. government placed Huawei on a trade block list that prevents American companies from doing business with it.
Without Huawei and other Chinese companies, it would be nearly impossible for Skyworks to significantly diversify away from Apple because of Apple's global dominance in premium smartphones, an area from which Skyworks captures outsize revenue. But luckily for Skyworks, 5G is about more than just mobile phones.
Image source: Skyworks Solutions.
Skyworks refers to everything outside mobile phones as broad markets. As of the quarter ended June 30, broad markets made up 38% of its total revenue, growing at 38% year over year. By diversifying into broad markets, the company widens the breadth of its customer base beyond high-end smartphones and tablets.
As wireless technologies continually improve in speed, latency, and performance, many more use cases should open up in areas like connected home and self-driving cars. And Skyworks is investing ahead of many of these newer use cases.
For example, in July 2021, it completed its acquisition of the Infrastructure & Automotive business of Silicon Laboratories. This acquisition will strengthen the company's position in electric and hybrid vehicles, industrial and motor control, power supply, 5G wireless infrastructure, optical data communications, and the data center. These investments in broad markets appear to have tremendous growth prospects over the long term.
Image source: Skyworks Solutions.
As of 2021, the company was generating $1.6 billion from broad markets. And according to market intelligence firm MarketsandMarkets, the market for the Internet of Things (most of what Skyworks labels broad markets) should grow from $300.3 billion in 2021 to $650.5 billion by 2026, at a compound annual growth rate (CAGR) of 16.7%. By the close of 2021, Skyworks had only penetrated less than a percent of its total opportunity in broad markets.
What you should watch
The main thing investors should pay attention to is that the wireless industry has produced a new generation of wireless technology every ten years; therefore, you can look for a likely introduction of 6G as we approach 2030. Should Apple attempt to displace Skyworks, it will likely happen as we approach the next decade. And if Apple still remains a significant customer at that time, Skyworks could be in jeopardy of losing significant revenues, resulting in a serious stock decline.
Skyworks currently trades at a price/earnings to growth (PEG) ratio of 0.89 versus the Semiconductors-Radio Frequency industry's PEG ratio of 1.21, according to stock research website Zacks. Most investors consider a PEG ratio below 1.0 a sign of an undervalued company.
If you choose to buy this stock, you must accept the risk that, in the short term, the threat of Apple leaving could result in Skyworks remaining undervalued. And in the long term, its stock could face challenges if and when Apple chooses to drop Skyworks as a component supplier.
