Please ensure Javascript is enabled for purposes of website accessibility

2 Beaten Down Apple Inc. Suppliers to Buy in May

By Ashraf Eassa - May 3, 2016 at 10:15AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This Fool likes these two beaten-down tech stocks.

Image credit: Apple. 

Technology stocks have a reputation for being volatile, no doubt due to the incredibly dynamic nature of the technology industry in general. However, the same fundamental rules that apply to non-technology stocks applies to technology stocks: buying and holding high-quality businesses for the long-term is often a great way to build wealth.

In this column, I'd like to talk about two beaten down tech stocks -- suppliers to Apple (AAPL 2.45%), in fact -- that have solid long-term prospects and that tech investors should consider buying: Synaptics (SYNA 4.41%), and Skyworks Solutions (SWKS 3.99%).

Synaptics' woes seem temporary
Synaptics develops what are called "human interface solutions" -- in other words, the technologies implemented in modern computers to allow people to interact with them. Examples include touch controllers for smartphones/tablets, PC touchpad controllers, pressure sensors technology for mobile devices (aka 3D Touch), display driver chips, and more.

The stock recently tumbled from north of $85 per share to under $70 per share as a result of a significant revenue miss in its recent quarter and very ugly forward guidance ($300-$340 million against consensus estimates of $478.6 million).

The miss, according to CEO Rick Bergman, is attributable to a "precipitous drop in order levels within the smartphone market, specifically around our display driver customer." In addition to weakness in premium smartphones, PC-related revenue also came under pressure as a result of the continued weakness in the PC market overall.

Bergman also noted that the company is taking a "cautious approach" to setting its guidance for the fourth fiscal quarter "in anticipation that the level of product currently in the supply chain will be sufficient to meet the reduced demand for our display driver products from high-end smartphone OEMs."

Although the picture looks pretty grim in the near-term, there's a solid chance that things could rebound in the second half of the calendar year. Apple's upcoming iPhone 7-series launch could help, particularly on the display driver side of things, and management has indicated that it has secured many wins for its finger-print sensors as well as its ClearForce technology (Apple 3D Touch clone).

In my view, Synaptics is a company that executes very well on technology but is currently facing a slump due to factors largely outside its control. If those factors subside, I expect Synaptics' financials, and ultimately its stock, to sharply rebound.

As a result, Synaptics could be a very interesting buy here for the patient tech investor. 

Skyworks: revenue growth even if iPhone units don't
Skyworks is a well-known supplier of Radio Frequency, or RF, chips into the smartphone market, as well as into other applications.

The very interesting thing about being an RF chip player is that each year, the complexity of the RF technology required in smartphones goes up.

"Among our top customers, we see complexity and increasing performance requirements driving content expansion across the board," said Skyworks CEO David Aldrich on a recent conference call with analysts.

"For example, our overall content on Samsung's (NASDAQOTH: SSNLF) flagship Galaxy S7 platform is up 20% versus prior models," Aldrich added. He also pointed to a 40% increase in content within Huawei's "new flagship smartphone platforms."

The upshot of this continued surge in RF content inside of smartphones is that even in an environment in which units aren't growing, Skyworks can still see total revenue growth. There's little doubt that this increase in content/complexity is helping to fuel the company's gross profit margin growth, which Aldrich said came in at up 410 basis points (i.e. 4.1%) year-over-year.

As of a recent check, Skyworks trades at $67.12 per share, down substantially from its 52-week high of $112.88. On a Generally Accepted Accounting Principles basis, Skyworks delivered $4.91 per share in earnings, and I believe over the long-term this can continue to grow.

I think at current levels, Skyworks shares look compelling and could be a very interesting way to play a potential recovery in the smartphone market (especially iPhone), particularly since it can grow revenue fairly independently of industry unit growth through content growth.


 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Skyworks Solutions, Inc. Stock Quote
Skyworks Solutions, Inc.
SWKS
$98.03 (3.99%) $3.76
Synaptics Incorporated Stock Quote
Synaptics Incorporated
SYNA
$128.78 (4.41%) $5.44
Apple Inc. Stock Quote
Apple Inc.
AAPL
$141.66 (2.45%) $3.39

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
321%
 
S&P 500 Returns
111%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.