It's no secret that Skyworks Solutions (NASDAQ:SWKS) absolutely loves Apple (NASDAQ:AAPL). The chip maker's wireless radio components have become part and parcel of every iGadget, including the latest iPhones and iPads.
This position as a major component provider ties Skyworks' shares tightly to Apple's. With very few exceptions to the rule, Skyworks shares tend to jump or plunge on the same days as Apple's, only further and faster:
This has generally been a fantastic deal for Skyworks investors as share prices have grown nearly fivefold in the last four years
Tonight, Apple reports holiday-quarter results, which will spell feast or famine for Apple investors and Skyworks owners alike. The two stocks will move in tandem tomorrow, whatever the direction.
But will a weak Apple in 2013 spell absolute doom for Skyworks? The answer is a short-term "yes," but with a long-term silver lining to the thundercloud.
The bad and the ugly
I've already shown how sensitive this stock is to Apple's short-term price swings. But the truth is, Skyworks is a pretty diverse company. Keep that in mind as the next few paragraphs start painting a dire picture.
Manufacturing contractor Foxconn stood for 29% of Skyworks' sales last year, with most of these going into Apple products. Samsung stood for another 17% of Skyworks' revenue. No other customer contributed more than 10% to the total revenue pie. Nokia (NYSE:NOK) was a 13% customer just one year earlier, but fell out of the elite customer echelon as the Finnish handset maker fell behind in the global smartphone race.
The downfall of a major customer like Nokia is never good news, and Skyworks did take a brutal 43% fall alongside Nokia in 2011. For another example of this kind of unfortunate coupling, you could look at Marvell Technology (NASDAQ:MRVL), which has shipped central processors for Research In Motion 's BlackBerry phones for years. The decline of the BlackBerry platform has been thoroughly documented, and Marvell doesn't like that trend at all. Using 2011 as an example again, RIM shares plunged 76% while Marvell took a smaller 25% dive.
If Apple disappoints tonight and keeps falling all year long, there's no question that Skyworks investors will suffer, too.
So what's that silver lining I was talking about earlier? Diversification breeds stability, and this stock should bounce back in years to come even if Apple goes entirely out of style. In the meantime, long-term investors get to build positions while Skyworks trades at Chicken Little discounts.
Why am I so sure that Skyworks would survive even without its largest customer?
The company has managed the spoils of its smartphone-era success wisely. Skyworks is now debt-free and cash-rich, and runs on profit margins investors could only dream of five years ago.
Remove the entire Apple contribution from the equation, and Skyworks's sales would fall by as much as 22%. Apply that doomsday scenario to last year's results, and they're still higher than the total revenue tally in 2010. That would be painful but hardly a killing blow.
Profit margins would shrink but not disappear. The rock-solid balance sheet can take several lean years while management looks for other markets to replace the presumably fallen Cupertino giant. And thanks to Skyworks' intimate co-marketing relationship with Qualcomm (NASDAQ:QCOM), which is now the world's largest chip designer by market cap. The Qualcomm tie-up alone ensures that Skyworks will stay relevant in the mobile computing arena, no matter which major player ends up "winning the smartphone wars."
So even if Apple leaves Skyworks investors reaching for Band-Aids and a bottle of Scotch tonight, I think it would be counterproductive to sell on the terrible news. It makes far more sense to add to your Skyworks bet while it's cheap.