Skyworks Solutions (SWKS 0.33%) primarily deals in chips that enable wireless connectivity, so the company has a big addressable market in the future as the consumption of data is expected to grow manifold. Skyworks' performance this year has been fantastic, with shares appreciating more than 45%. The company is also benefiting from its supplier relationships with Apple (AAPL +1.08%) and Samsung. So, despite good gains in the current year so far, Skyworks still has room to run.
Strong results set the tone
Skyworks' strength is seen in its recent second-quarter results, with the company outperforming as a result of strong sales of chips used to connect machines to the Internet. Skyworks' revenue increased a decent 13% year-over-year to $481 million. In addition, on a non-GAAP basis, operating income also rose 31% to $130.4 million. On the earnings front, EPS came in at $0.62 per share, beating the consensus estimate of $0.59 per share. The company foresees strong demand for its chips going forward, which should help it sustain consistent performance.
With the booming smartphone market and customers shifting to smartphones from budget phones, Skyworks expects an improvement in its performance. The company is leveraging its analog design expertise and is also focusing on expanding its product portfolio with new products.
Growth opportunities
The growth in 4G LTE is a big boost for Skyworks. The company expects this segment to gain traction in the future, especially due to LTE deployments in Asia. Skyworks has great expectations from the Asian market. The company is confident about this market and its views are endorsed by Credit Suisse, which estimates that the number of LTE-connected smartphones in Asia will grow by over 70% over the next two years.
China is one of the largest smartphone markets in the world, and Skyworks expects it to become a cornerstone for its success. Skyworks' management points out that 80% of phone users in China currently use a 2G device. The company expects these customers to move to the latest technology in the future, resulting in higher demand for connectivity chips. Also, Morgan Stanley believes that by 2020, there will be 75 billion connected devices globally.
Skyworks is trying to benefit from these rosy growth projections with its 802.11ac Wi-Fi chip. This chip is expected to support several connected applications such as set-top boxes, Blu-ray players, 4K televisions, and 4G LTE services. So, as a supplier of connectivity chips, there are significant opportunities for Skyworks to enhance its sales.
Apple is a growth driver
Apple is one of Skyworks' most important customers. Both companies are expected to benefit from the growing LTE environment. Having struck a deal with China Mobile, Apple can now sell its iPhones to more than 780 million subscribers. Also, Apple's possibility of benefiting from the Chinese market should increase if the smartphone company releases a phablet in the future.
Phablet sales in China are booming, with 40% of customers buying such devices. Apple is said to be preparing a 5.5-inch device to profit from this market. If this comes eventually comes to fruition, Skyworks would be in for some big gains.
Bottom line
Skyworks is presently trading at a P/E ratio of 26, which might look slightly overvalued. But, Skyworks has good catalysts that could help it outperform in the future. Its diversified operations and expectations from the growing LTE platform can result in long-term growth. Also, the company's earnings are expected to grow at a steady rate of 16.87% for the next five years. So, investors should not mind paying a slight premium for the stock, as it looks promising.
