What initially started as a strong rally to start 2023 has quickly turned back into pessimism for Skyworks Solutions (SWKS -2.67%). It's not completely surprising. Smartphone sales, especially of Android devices, are in the middle of a nasty downturn -- and that's dragging down Skyworks' expected rebound for its wireless network connectivity chips.

This may come as a surprise, especially considering the great quarter of device sales slow-but-steady Apple just reported. Skyworks said about 64% of its revenue was attributable to the iPhone, iPad, and Apple's other consumer electronics.

Is it time to sell Skyworks Solutions stock? 

An ugly quarter, and (at least) one more to go

About that quarter ended in March 2023 -- you know, the one that corresponds with Apple reporting record quarterly revenue from its flagship iPhone in spite of global economic headwinds.

Apple Device Segment

Revenue For Quarter Ended April 1, 2023

YOY % Increase (Decrease)

iPhone

$51.3 billion

1.4%

Mac

$7.17 billion

(31%)

iPad

$6.67 billion

(13%)

Wearables, home, and accessories

$8.76 billion

(0.6%)

Total product sales

$73.9 billion

(4.6%)

Data source: Apple.  

Given nearly two-thirds of Skyworks sales are still coming from Apple -- despite years of efforts (and a 2021 automotive and infrastructure chip acquisition from Silicon Labs) -- one might expect Skyworks' last quarter would be better. No dice, though.

Revenue fell nearly 14% year over year to $1.15 billion. Adjusted earnings per share (EPS) fell 23% to $2.02 as Skyworks' manufacturing facilities struggled with underutilization. 

This speaks to the weakness ongoing in Android phones (Android accounts for the other one-third of Skyworks revenue). Qualcomm also indicated this in its quarterly update too. And although Skyworks sees some sequential improvement coming during the back half of calendar year 2023, the next quarter (which will end in June) is expected to notch another sequential decline. Revenue is expected to be $1.05 billion to $1.09 billion (a 7% decline from the March-ended quarter at the midpoint) and adjusted EPS to $1.67 (a 17% sequential decline).  

When asked if mobile connectivity chip weakness is spreading from Android to the Apple ecosystem, CFO Kris Sennesael said simply on the earnings call that "[Apple] manage their supply chain very well." That's an understatement.

The highly fragmented Android smartphone market is a mess, and that's holding Skyworks back at the moment, despite stable Apple connectivity chip sales and progress being made in its other non-connectivity chip portfolio.

Improving financials, despite the downturn

Despite this nasty downturn, Skyworks remains a highly profitable enterprise. Halfway through its current fiscal year, the company has generated record free cash flow of $1.1 billion, a free cash flow profit margin of 43%. However, rather than repurchasing shares like it has the last couple of years, Skyworks used this record free cash flow to repay $200 million worth of loans and bolster its balance sheet to $1.06 billion in cash and short-term investments. It will need that cash to repay another $500 million's worth of debt that comes due this spring -- debt it took on to make that acquisition from Silicon Labs a couple of years back.

As of the end of March, Skyworks' outstanding debt was at $1.99 billion. 

Given the cyclical downturn in the chip market -- an unfortunate but inevitable situation that crops up for Skyworks every few years -- I'm not inclined to sell now. The time to trim a position is during a cyclical upswing. You know the old "buy low, sell high" adage.

SWKS Revenue (TTM) Chart.

Data by YCharts.

Nevertheless, given Skyworks' high reliance on Apple, and Apple stock's long-term outperformance of Skyworks (even when factoring for reinvested dividends along the way), I think trimming Skyworks stock might be a good idea, eventually. It is worth noting, though, that Skyworks hasn't been so shabby a bet since the iPhone's debut in June 2007. It's just the last few years that have been tough as Skyworks has tried to diversify its semiconductor offerings.

SWKS Total Return Level Chart.

Data by YCharts.

Currently, Skyworks stock trades for just 14 times trailing-12-month free cash flow. It looks mighty cheap if you expect business to begin to rebound in the second half of this year and if this chip design and manufacturing outfit can keep making progress by branching out into new domains (like electric vehicles, for example). Simply put, I don't think now is the time to sell Skyworks Solutions stock. I'm holding my position for now.