Skyworks Solutions (SWKS 10.63%) has started 2014 on the front foot. Close followers of the company might have already seen this coming since Skyworks was carrying good momentum into the New Year and looked set to outperform. The stock gained more than 6% after posting first-quarter results, and there are indications that Skyworks is ready to hit new highs going forward, driven by its cutting-edge technology and key clients such as Apple (AAPL +0.44%), Samsung, Chinese chipmakers, and probably Google (GOOG +2.22%) and General Electric (GE +6.10%).
Skyworks' robust outlook is a clear indicator of the fact that the company is going to outperform the chip industry going forward. It expects year-over-year revenue growth of 11% in the ongoing quarter, along with a 23% jump in earnings, ahead of Wall Street's expectations. Fool analyst Anders Bylund pointed out that "Skyworks' management expects to grow faster than the analog chip industry in the next quarter," and this sets the tone for the rest of the year.
No dearth of opportunity
As a supplier of connectivity chips for various applications, there are a lot of opportunities ahead for Skyworks to grow its business. According to Morgan Stanley, by 2020 there will be 75 billion connected devices around the world. Skyworks has been positioning itself to benefit from this trend. The company's 802.11ac Wi-Fi chip is expected to address the needs of various connected devices such as set-top boxes, Blu-ray players, 4K televisions, and 4G LTE services.
The adoption of faster data services across the globe, the increase in the types of consumer mobile devices, and expansion into new markets should all further expand Skyworks' addressable market.
For instance, Apple's recent deal with China Mobile is a good example of how Skyworks stands to benefit from the expansion of its clients' products in new markets. When Apple finally struck the long-awaited deal with China Mobile, it got access to more than 700 million subscribers. Initial signs look promising, as Apple received more than 1 million pre-orders for the iPhone through China Mobile.
Analysts expect this particular deal to boost Apple's iPhone sales by 15 million-30 million units, according to The Wall Street Journal, which means that Skyworks should see greater orders for its chips from the smartphone behemoth. Moreover, since Skyworks was already reported to have gained content in the latest iPhones, according to Canaccord Genuity analyst Michael Walkley, it is not surprising to see why Skyworks issued a strong outlook.
More catalysts
Next, Skyworks is focusing on the Asian smartphone market, where broadband penetration is still low. According to Credit Suisse, LTE-enabled smartphones in Asia are expected to grow more than 70% in the next two years, and Skyworks is making its way into this market through important chipmakers such as MediaTek and Spreadtrum. Skyworks' solutions are present on the latest MediaTek quad-core and LTE platforms, and considering that the company accounts for half of the Chinese smartphone business, this is an important partnership for Skyworks.
Next, as stated earlier, Skyworks has positioned itself to benefit from connected devices, or the Internet of Things. The proliferation of connectivity across different verticals such as automotive, industrial, and medical could provide another boost to Skyworks.
The right partnerships
Skyworks has already inked a partnership with General Electric to supply chips for health care applications. Looking ahead, GE is planning to integrate machine-to-machine communications across its entire industrial portfolio, including jet engines, locomotives, turbines, and medical devices. GE is looking to boost GDP to the tune of $10 trillion-$15 trillion in the next 20 years through its industrial Internet applications, and Skyworks might be one of the beneficiaries.
Also, Skyworks could see better business from Nest Labs, which deals in smart home products such as thermostats and smoke detectors, and was recently acquired by Google for $3.2 billion. Skyworks management stated that the company has "an extremely strong relationship and high content" at Nest.
After the Google acquisition, there could be a ramp up in demand from this particular customer, as the Internet giant is focused on making its move into the smart homes market. The acquisition gives Google a strong platform to foray into this market since Nest's smoke alarm is already an acclaimed product. Plus, since it has Skyworks technology in it, the chip maker also stands to gain.
The takeaway
Skyworks is sitting on a huge market. It has successfully warded off competition from bigger players such as Qualcomm in 802.11ac Wi-Fi chips and looks set to get better on the back of key partnerships and clients. Thus, at a trailing P/E of around 21, Skyworks continues to remain a good bet as its earnings are expected to grow at a CAGR of 15% over the next five years. The stock performed well last year and, given its business prospects, it should continue doing well.
