For nearly as long as investors have known a company called Skyworks Solutions (SWKS -0.86%) existed, it's also been known that the semiconductor company has enjoyed a wildly profitable run as an Apple (AAPL -0.57%) supplier. As an integrated designer and manufacturer of connectivity chips, Skyworks helped power mobile network capabilities for the iPhone, iPad, Apple Watch, and more. Despite years of work to diversify, though, Apple still accounted for a whopping 58% of Skyworks' total revenue in the recently concluded 2022 fiscal year.
Skyworks recently revealed that one of its newer markets is electric vehicles (EVs) and other connected cars. The company expects solid growth from this segment in the coming years, though a recession risk looms large in 2023. Is Skyworks stock a buy for the new year?
From small beginnings, a new segment is born
There are a number of reasons Skyworks Solutions should be interested in diversifying away from Apple. Though a supplier contract is incredibly lucrative, Apple already designs some of the most critical chips in its products, like the M-series processors for the MacBooks. Apple has also been working on its own 5G modem chips for use in the iPhone as it tries to cut ties with Qualcomm.
This isn't to say Apple is at all interested in parting ways with Skyworks, but it's a risk worth bearing in mind given that so much of Skyworks' revenue comes from iOS devices. Plus, while Apple has been a fantastic partner for Skyworks shareholders, it isn't exactly a high-growth market like it was in the previous decade. After a huge initial 5G network upgrade cycle over the last couple of years, Apple device sales are overall likely a single-digit-percentage growth outlet for Skyworks going forward.
Data by YCharts.
That's where the company's "broad markets" segment, which accounts for all chips outside of smartphones, comes in. During the fourth-quarter fiscal 2022 earnings update (for the three months ended September 2022), Skyworks said broad markets were about 36% of total revenue. At a recent tech conference, SVP of Sales and Marketing Carlos Bori said this was about a $2 billion-a-year outlet. Of that $2 billion, automotive chip sales were at an annualized $200 million run rate (or less than 4% of total revenue).
It's a small segment for Skyworks to be sure, but with the EV market gobbling up share of the massive legacy internal combustion engine vehicle market, Bori alluded to this EV and other auto tech segment being about a 30%-a-year growth outlet in the next few years as EVs overtake petrol engines.
Customers include none other than Tesla and China's top EV maker BYD, as well as legacy automakers like Volkswagen and Toyota, to name a few.
Unexplored roads lie ahead for this chipmaker
What exactly do these new EV chips do? Rewind back to 2021, when Skyworks made a transformational bet when it purchased the infrastructure and automotive segment from Silicon Labs. Included in that purchase were traction converters (which make high-voltage battery power usable by an EV motor), battery management and charging system chips, and timing chips used in advanced driver assist systems (ADAS).
These non-wireless connectivity chip designs bring Skyworks into competition with other top automotive chipmakers like Texas Instruments, NXP Semiconductor, and Analog Devices. But Bori said Skyworks' portfolio of products is differentiated, owing to its history as a connectivity chip specialist, including for automakers. Many semiconductor companies have been trying to expand their lineup of designs in recent years, giving their customers the opportunity to order hardware in larger bulk and save money. Perhaps Skyworks will find success in a similar strategy.
At any rate, Skyworks thinks its broad markets portfolio (helped in large part by automotive) will grow at a much faster rate than its large smartphone segment, helping the company overall achieve low-teens-percentage average annual growth in the coming years. Skyworks uses its free cash flow to repurchase lots of stock on top of the dividend it already doles out to shareholders, so earnings per share should grow even faster than that.
With the smartphone market -- especially Android phones -- down in the dumps right now, Skyworks Solutions stock got punished. Shares trade for a measly 12 times trailing 12-month earnings per share, and 17 times trailing 12-month free cash flow. If you believe the company can grow its profitability by a low- to mid-teens percentage over the next three to five years, this stock looks like a wonderful value at the start of 2023.
