The stock of Skyworks Solutions (NASDAQ:SWKS) was on a tear for the first five months of the year, but fell off a cliff after the company's woeful performance in the second quarter. Skyworks gave investors another jolt in early June when it slashed its third-quarter outlook.
But surprisingly, investors have shown faith in the stock, and it made a comeback in June. And the recent pullback in the stock makes it a solid bet for the second half of the year. The chipmaker is looking at some impressive catalysts that could help sustain its momentum and investors will get a better look when the company reports third-quarter earnings on Aug. 7.
A Huawei resolution would be a tailwind
Skyworks downgraded its third-quarter revenue outlook to a range of $755 million to $775 million from the prior range of $815 million to $835 million thanks to the addition of Huawei to the U.S. government's Entity List, which makes doing business with the Chinese company very difficult. Huawei supplied 12% of the chipmaker's revenue in the first half of the fiscal year that ends in September, and its addition to the list meant that Skyworks had to cease shipments to the company. The good news for Skyworks is that the U.S. and China are once again trying to resolve their trade disputes.
President Donald Trump has also agreed to allow sales of products to Huawei that don't impact national security. Skyworks stock started soaring in the wake of Trump's about-face, but we don't know if the new rules will include Skyworks' products.
All set for a strong second half
A trade truce between the U.S. and China could give Skyworks a big boost in the 5G market, since Huawei has landed around half the 5G contracts issued by China Mobile, which is the country's largest operator.
Huawei has also been making waves in the smartphone space by displacing Apple from the No. 2 spot in the global rankings from IDC. Huawei's smartphone shipments in the first quarter of 2019 increased more than 50% year over year to 59.1 million, and its market share jumped 7.2 percentage points. Given that global smartphone shipments dropped 6.6% in the first quarter of 2019, that performance was particularly impressive.
Skyworks has already said that it expects weakness in the mobile business this year, which is why supplying smartphone chips to Huawei is important for the company. But the bigger thing to note here is that smartphone demand should start picking up in the second half of the year.
As 5G networks have already been rolled out in important markets such as the U.S., the U.K., and a few other countries, compatible devices will follow. Qualcomm estimates that as many as 30 5G devices could hit the market in 2019. This could spur upgrades by users who have been holding on to their devices, waiting for 5G networks to arrive. As such, don't be surprised to see an uptick in Skyworks' mobile business toward the end of 2019.
The chipmaker relies on mobile for two-thirds of its total revenue, and a turnaround on this front will give its top and bottom lines a nice shot in the arm.