Skyworks Solutions: The Pullback Is an Opportunity

Skyworks Solutions (SWKS) shares have lost momentum in the last three months despite impressive results of late. The stock has lost over 21% of its value recently, which seems surprising given the pace at which its performance improved last quarter. In fact, for the third quarter, Skyworks' revenue was up 38% year-over-year to $810 million, surpassing its own guidance. Additionally, the company's net income increased 63% on a year-over-year basis.

But, despite these numbers and a strong forecast for the ongoing quarter, Skyworks shares have receded on account of broader weakness in the stock market.

The company is gaining strong traction as a result of design wins and expanding customer traction, which is why I think that its drop is a buying opportunity.

Growth across the board

The growing share of integrated mobile systems in Skyworks' product mix is driving its performance. Last quarter, the company delivered 50% margins in this segment, apart from long-term growth rate in the range of 15% to 20%. However, the business share of power amplifiers has declined from 60% in 2011 to just 38% in the previous fiscal year, delivering 40% to 45% margins and nearly 5% of LT growth rate.

But, Skyworks' product mix is improving for the better, which is good news for the company. All in all, its revenue and operational income grew 38% and 65% respectively over the third quarter of 2014. Skyworks delivered a robust operating margin of 36.5% with return on invested capital of approximately 30%. Looking ahead, the company's financial performance should improve due to an evolution of mobile technology from 3G to 4G LTE.

The company is increasingly focusing on product development to create advanced 3G and 4G LTE mobile technology solutions which are believed to deliver significant top line growth for the company. This is a smart move from Skyworks as global mobile data consumption has increased at a CAGR of 57% with several major content drivers in recent years. This has accelerated the demand for ultra-fast networks, thereby adding to Skyworks' growth opportunity.

All in all, the number of connected devices is forecasted to hit 1 billion by 2020. Additionally, smartphone usage is estimated to grow from just 100 million units in 2008 to a significant 2 billion units in 2020. Further, the Internet of Things (IoT) is expected to expand from a 6 billion user base in 2012 to 43 billion in the fiscal year 2020.

Thus, the market is expanding for Skyworks due to an increase in data consumption, and this is why the company's financial performance will continue improving.

Product development is leading to design wins

Skyworks recently won an important contract for RF content as it will now enable D-Link's advanced 802.11ac Wave 2 devices. The AC3150 (DIR-885L/R) and AC5300 (DIR-895L/R) ultra Wi-Fi routers are compatible with tri-band 2.4 and 5 GHz technology and offer wireless speeds up to 3.2 Gbps and 5.3 Gbps, respectively.

The penetration of Skyworks into connected homes and automotive applications categories, coupled with being a key provider of RF content for D-Link's advanced wireless devices, will help the company improve its traction going forward.

Moreover, Skyworks is strategically expanding its filter operations in Japan by building a design, development, and filter devices manufacturing facility to capitalize on expanding market demand for highly integrated solutions. At this facility, Skyworks will successfully deliver customized front-end architecture and thus improve margins and operational efficiencies.


Finally, considering the company's valuation, Skyworks is a good investment. The company has a trailing P/E ratio of 21.78 and a forward P/E ratio of 13.45, pointing toward future earnings growth. The PEG ratio of 0.81 also indicates undervaluation. Hence, investors should consider buying the pullback in Skyworks for long-term profits.

Published on Sep 10, 2015
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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