Skyworks solutions (SWKS, Financial) – a company known for its analog semiconductor components for iPhone – posted stellar results for its third fiscal quarter of 2018 on Thursday, comprehensively beating analysts’ consensus.
Revenue for the quarter came in at $894 million, about $5 million more than what Wall Street was looking for. The Massachusetts-based semiconductor company managed to post $1.64 in earnings per share, ahead of the analysts’ earnings consensus of $1.60 a share.
For the fourth fiscal quarter of 2018, Skyworks is guiding for double-digit growth with revenue growing 11-13% and earnings 16% during the quarter. In effect, the company is looking for midpoint revenue of $1 billion, in-line with the consensus data. Earnings per share, however, is expected to reach $1.91 ahead of the consensus of $1.84. The stock gained 3% on the news, only to retract 5% by market close on Friday.
What promoted revenue growth?
“Skyworks exceeded June quarter expectations driven by our broadening market reach, solid execution and resilient business model,” said Liam K. Griffin, president and chief executive officer of Skyworks in the earnings press release.
Although the revenue was down slightly during the quarter year-over-year, Skyworks managed to post 7% growth during the nine months ended June 2018.
Revenue continues to grow for Skyworks as the company is successfully capturing the higher frequency content in smartphones. Two Skyworks chips were featured in Samsung’s (SSNLF, Financial) Galaxy S9. The recently released OnePlus 6 features a power amplification module from Skyworks. Note that OnePlus 6 was quickly sold out after its release during May. This might have added to the top line of Skyworks. Huawei’s latest flagship P20 Pro also features three front-end LTE modules from Skyworks. Given the rapid rise of Huawei in the smartphones market, Skyworks revenue growth might have taken a nudge from the Chinese OEM. Moreover, machine-to-machine (M2M) communication and automotive market is also boosting Skyworks’ revenue, according to the management.
What the outlook?
“From a market perspective, we are entering the seasonally strong second half while on track for another year of record financial performance,” Liam Griffin, the company's CEO, said on the conference call on Thursday. The management also noted that it has several flagship design wins with Huawei, Samsung, Oppo, Vivo, LG and Nokia (NOK). Add the upcoming iPhone to that list and it looks like Skyworks is going to have a great second half of calendar year 2018.
From a long-term perspective, the rise of 5G and need for higher frequency radio chips bodes well for Skyworks. Note that Ericsson forecasts that 29 billion IoT devices will be interlinked by 2022. A research from a semiconductor market research firm Yole Development notes that RF front-end market is expected to grow at a CAGR of 14% during 2016-2022 to reach $22.7 billion. The 5G market is even more aggressive as the RF front-end module market for 5G cellphones is projected to reach USD $35.3 billion by 2025, at a CAGR of 35% between 2020 and 2025.
What are the headwinds in 5G?
There are also some challenges ahead for Skyworks in the 5G space. For starters, the market is crowded with many players including Broadcom (BRCM, Financial), Qorvo (QRVO, Financial), Murata, TDK/Qualcomm (QCOM, Financial).
Right now, Skyworks offers a competitive SiP (system in package) solution for current 4G RF front-end modules. However, once 5G kicks in, there’s a possibility for semiconductor players to move on to SoC (system on chip) solutions rather than SiP. This will allow companies like Intel (INTC, Financial) and Qualcomm (QOM) to directly get into the RF chip business, which doesn’t bode well for Skyworks. However, it’s yet to be seen if and when 5G mmWave technology – connectivity at frequencies higher than 24 GHz – hits the mainstream.
Right now, the technology faces challenges such as high power consumption and loss of signal for smartphones. Therefore, the first deployment of 5G will most probably be based on currently used sub-GHz bandwidths, which support the current SiP solutions provided by the like of Skyworks and Qorvo.
To summarize, Skyworks is set to benefit from the growth of high frequency chips in upcoming flagships from Apple (AAPL, Financial), Samsung and Huawei. Over the long term, the company will benefit from the adoption of sub-GHz 5G. However, the company has to innovate faster in order to remain relevant in the mmWave 5G landscape of the future.
What’s the thesis?
Short-term growth prospects are intact as evident from the results of the quarter and the forward guidance. Things also look good in the medium term as the industry shifts towards first 5G sub-GHz solutions. In the long run, the company has to innovate but the mmWave 5G still face several challenges. Given the cheap valuation and visibility around the short and medium term, Skyworks seems to be a decent buy. The stock is trading at merely 13 times forward consensus earnings. Moreover, earnings are set to grow in double-digits during the next few years or so. In short, buy the dip.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
