Skyworks Solutions (SWKS 1.83%) reported its fiscal 2023 first-quarter results on Feb. 6, with revenue and earnings per share figures in line with analysts' estimates. Looking forward, however, the current quarter's guidance came in well below expectations. Even then, bullish investors bid the stock up 12.5% the day after the release, shrugging off concerns around an overall terrible holiday quarter for the smartphone industry, with worldwide smartphone shipments down 18.3% year over year, according to IDC.
Considering the global economy still faces significant uncertainty, should you invest in the stock after its recent jump or remain cautious in the current environment?
There is a light at the end of the tunnel
Skyworks grappled with multiple headwinds in 2022, including weak demand for consumer electronics, high inventory levels from a component supply glut, supply chain disruptions, a collapsing market for Android in China, and COVID-19 lockdowns in China that negatively impacted major smartphone manufacturers. These problems combined to drive its revenue and profits lower in 2022.
Data by YCharts.
The worst part is most industry insiders believe the smartphone market will remain weak well into 2023 until manufacturers and component suppliers reduce their inventories to match consumer demand. However, investors are just now beginning to see the light at the end of the tunnel.
First, the U.S. inflation rate dropped from 9.1% in June 2022 to 6.5% in December. As inflation declines, Wall Street anticipates the Federal Reserve pausing interest rate hikes sometime in 2023. Historically, the market has rallied when the Fed stops raising rates. As a result, despite a lackluster earnings report, Skyworks stock likely jumped as investors wanted to establish a position ahead of what they believe will be a bigger rally in the stock later this year.
Second, management anticipates its sales rebounding in the latter half of 2023 based on known design wins with customers. If those plans come to fruition, Skyworks could see revenue and earnings growth reaccelerating to close out the year. And it would not take much to ignite a rally in the stock considering its low valuation.
Today, Skyworks' price/earnings-to-growth (PEG) ratio is 0.83, a deep discount to the broader industry ratio of 1.8. Also, a PEG ratio below 1.0 is a popular benchmark for an undervalued company.
There is a long-term growth opportunity
Another thing working in Skyworks' favor is the rapid development of 5G technology. To be clear, 5G is not just one technology but three different technologies: low band, mid-band, and mmWave high band.
Every nation is rolling out these different 5G technologies in stages, and each time a new phase is rolled out, it requires more components in the smartphone. So Skyworks built Sky5, a device its customers can customize to address one, two, or all three 5G technologies and other wireless technologies such as WiFi and GPS.
Image source: Skyworks Solutions.
The best part for Skyworks is that 5G is only in its early stages. So each time its customers need more capabilities, they buy more wireless component content in Sky5, which drives additional revenue for the company over the long term.
Another thing that drives long-term revenue is that 5G enables more use cases outside mobile phones, including the Internet of Things and industrial and automotive applications. Skyworks classifies these new use cases as "broad markets" to differentiate the segment from the smartphone business. As of the end of the first quarter, broad markets made up 35% of its revenue.
Image source: Skyworks Solutions.
Skyworks even has the technology to enable satellite communications (satcom), and there are rumors the company enables satcom connectivity on Apple's iPhone 14 lineup.
Satcom could be an enormous opportunity. Now that the iPhone has the capability, high-end Android phone manufacturers will likely also incorporate the feature, which means more wireless content for Skyworks to monetize.
In the latest earnings call, Skyworks CEO Liam Griffin said it's still early for the company's satellite products in the global market. Still, as the market evolves, it plans to be a significant player in the opportunity.
Strong free cash flow
One of the great things about this company is that it has produced strong free cash flow (FCF) over time.
Data by YCharts.
Investors love companies with FCF, because in addition to reinvesting the cash back into the business, management can use excess cash to support buybacks and dividends. For example, Skyworks has increased its dividend for the last eight years at a 20% compound annual growth rate, and the stock yields 2.1% as of this writing. It has also repurchased $4.7 billion worth of shares since fiscal 2014, reducing the company's outstanding share count by 17%.
So if you are looking for a company with great FCF and robust long-term growth opportunities that the market is currently undervaluing, few stocks are better than this one.
