Where Will Skyworks Solutions Stock Be in 1 Year?

Skyworks Solutions' (SWKS 0.92%) stock rose 13% on Feb. 7 after it posted its latest earnings report. For the first quarter of fiscal 2023, which ended on Dec. 30, the diversified chipmaker's revenue dropped 12% year over year to $1.33 billion but still exceeded analysts' estimates by $10 million. Its adjusted net income declined 21% to $415 million, or $2.59 per share, which missed the consensus forecast by a penny.

Those declines weren't surprising, since the semiconductor sector is currently in the midst of a cyclical downturn, but will Skyworks' growth stabilize by the end of 2023 and lift its stock higher?

Image source: Getty Images.

What does Skyworks Solutions do?

Skyworks produces wireless chips for the mobile, automotive, home automation, wireless infrastructure, and industrial markets. It's an integrated device manufacturer (IDM) that designs and manufactures its own chips at its own plants instead of outsourcing them to a third-party foundry. That distinction -- which sets it apart from "fabless" chipmakers like Broadcom -- entitles Skyworks to subsidies, tax breaks, and other benefits from the CHIPS and Science Act that have been reserved for IDMs that manufacture their chips domestically.

Skyworks' largest customer is Apple (AAPL -0.02%), which accounted for a whopping 58% of its revenue in fiscal 2022. To reduce its long-term dependence on Apple, Skyworks has been expanding its portfolio to sell more wireless chips for Android handsets, industrial Internet of Things (IoT) devices, and connected vehicles. To accelerate that transformation, it acquired Silicon Laboratories' infrastructure and automotive unit for $2.75 billion in cash in July 2021.

But until it meaningfully expands those other businesses, Skyworks' future will remain tightly tethered to Apple's. That's a double-edged sword: Stable sales of Apple's devices would buoy its growth, but softer sales (which happened over the past year) could offset the growth of its non-Apple chips. Apple could also eventually replace Skyworks' chips with its own silicon.

How long will Skyworks' cyclical slowdown last?

Skyworks only has limited exposure to the PC market, which has been suffering a tough post-pandemic slowdown and punishing PC-centric chipmakers like Intel and AMD. However, its high exposure to the mobile market -- which faces a more modest slowdown as the 5G upgrade cycle ends -- has still throttled its overall growth.

Beyond Apple and the handset market, most of Skyworks' growth over the past year has been driven by mobile network upgrades, the expansion of cloud and edge computing networks, the development of new IoT devices, and the electrification of vehicles. As the following table illustrates, Skyworks still generated fairly consistent sales growth with stable gross and operating margins throughout 2022, but its top-line growth stalled out in the first quarter of fiscal 2023.

Data source: Skyworks Solutions. YOY = year over year. 

Skyworks attributed that slowdown to the softness of the Android handset market, which largely offset the stronger growth of its automotive, infrastructure, and industrial markets. During the conference call, CFO Kris Sennesael also admitted the chipmaker was seeing "some softness due to some macroeconomic challenges."

For the second quarter, Skyworks expects its revenue to decline 12%-16% year over year as its adjusted EPS drops 23%. But like many other chipmakers, Skyworks expects the semiconductor sector to bottom out in the first half of the year and gradually recover in the second half.

As for its own company-specific challenges, Skyworks expects sales of Android devices in South Korea and China to warm up again by the end of the year. Until that happens, it plans to adjust its production accordingly, rein in its expenses, and keep buying back its own shares. It already returned $1.2 billion to its investors over the past 12 months through dividends and buybacks, and it just authorized a fresh $2 billion buyback plan.

Where will Skyworks' stock be in a year?

For the full year, analysts expect Skyworks' revenue and adjusted earnings to decline 7% and 13%, respectively. But in fiscal 2024, they expect its revenue and adjusted earnings to rise 8% and 12%, respectively, as the company bounces back from its cyclical downturn. Skyworks' growth will likely remain sluggish through the end of 2023, but its low forward price-to-earnings ratio of 11, its decent forward dividend yield of 2%, and its ongoing buybacks should limit its downside potential.

I'm not sure if Skyworks can outperform the market this year, especially since it's so closely associated with Apple's weakening sales, but it could still climb higher if the semiconductor market finally stabilizes.