Why You Don't Want To Miss Out On Skyworks

May.12.14 | About: Skyworks Solutions, (SWKS)

Summary

Skyworks Solutions Inc. has an outstanding existing customer base.

The company's financial strength is unparalleled in its industry and still trades at a discount to peers.

The demand for its products will continue to grow in today's internet of things.

The "internet of things" is becoming more of a reality each day. As this shift towards sensor-based technology occurs, many companies will see expanding revenues. One such company is Skyworks Solutions (NASDAQ: SWKS). Between its existing customer base, its strong position in emerging markets, its dominance in the mobile sphere, and its financial strength, Skyworks is poised to capitalize on shifting trends and consequently see huge revenue growth.

Existing customer base

Skyworks' revenue is driven by the superior reliability of the company's products as well as its existing business-to-business customer base. These customers include Cisco (NASDAQ:CSCO), Google (NASDAQ:GOOG), Samsung, HTC, Honeywell (NYSE:HON), GE (NYSE:GE), Siemens (SI), Toshiba, LG, Sony (NYSE:SNE), Foxconn, Nokia (NYSE:NOK), Huawei, Lenovo, HP (NYSE:HPQ), and more. Skyworks is known in the cellular industry for the reliability of its outstanding products.

Mobile applications

Skyworks additionally creates components providing wireless connectivity for leading handset makers, including Google, Apple, Samsung, HTC, LG, Sony, among others. Having customers such as these allows Skyworks to remain a primary player in the industry. Apple's recent deal with China Mobile (NYSE: CHL) opens an entirely new market and will increase demand for components provided by Skyworks. Being the world's most populated country (over four times the population of the United States), Apple has a huge opportunity to expand its global footprint. Analysts estimate increases of 15-30 million iPhones shipped as a result of the deal, and each one of them will be equipped with Skyworks components. Apple has pushed its way into 5th place in China's mobile market with 6% of the share. Ahead of Apple rank Samsung, Lenovo, Yulong, and Huawei, three of which are already customers of Skyworks.

"Internet of things" applications

Skyworks has not just kept up, it has driven progress in the increasingly connected world and environment that we call the internet of things. Skyworks has the potential to add to its customer base with its automotive applications, including infotainment, keyless entry, satellite radio, as well as collision avoidance sensors, tire pressure sensors, toll tag transponders, and navigation systems. The demand for these products is ever present and growing, and the automotive industry will rely on companies like Skyworks in order to fulfill the demand. This past December, Honda (NYSE: HMC) introduced HondaLink - its new infotainment system. The Civic has been the best selling car in Canada for the past 16 years, and shows no signs of stopping. Honda's new infotainment system allows users to focus on the road while still accessing almost any type of data, such as music, navigation, phone calls, and nearby attractions. Since November, Chevy has been equipping its Sonic and Spark cars with MyLink. GM, Mercedes, and BMW have all followed suit with similar products.

Skyworks already has agreements in place with GE who already integrates Skyworks components into its security systems, lighting systems, washers, dryers, and other products. All indications point to increased wireless integration across all of GE's product lines.

The company also makes components for smart energy and connected home applications - security alarms, sensors, etc. It further offers components in RF, microwave, cellular base stations, access points, land-mobile radio systems, and point-to-point radio links. These are all crucial in wireless internet applications.

Skyworks capitalized on the smartphone movement, and the next big movement is here. Forbes calls machine-to-machine technology the next $100 billion market, and Skyworks is in a favorable position to take market share of this expanding market.

Financial strength

Compared to other companies in the semiconductor/integrated circuits industry, Skyworks ranks 6th in terms of Market Cap, 7th in ROE, and has zero debt. Skyworks' revenue growth over the past year has grown 13.3% compared to the industry average of 9.7%, and while most companies in the industry, especially those with higher market caps, tend to fund growth with debt, SWKS is debt free while still maintaining a quick ratio of 4.47. Additionally, its forward P/E is 12.98, less than the industry average of 15.

The company is very cheap compared to its competitors TriQuint (NASDAQ: TQNT) and Broadcom (NASDAQ: BRCM). Analysts' estimates range anywhere from $44 to $55 and, at today's price, Skyworks remains a great buy. I don't believe that a $75 price point is out of the question. On January 17, the share price rose 6.71% as the company reported first-quarter earnings exceeding analysts' expectations. On April 23, shares soared over 10% on second-quarter results beating analyst estimates on a 13% revenue increase. These are just a small showing of what is to come. I expect similar results following upcoming earnings reports and analyst upgrades.

Concerns

Although the markets for cloud-based solutions and machine-to-machine technologies are rapidly expanding, these markets are also highly competitive. Skyworks will need to distinguish itself from competitors, or else competition will simply lower prices and Skyworks will be forced to lower margins in order to compete. Even though margins may fall in the coming years, Skyworks remains a top pick due to their expansive customer base and strong financials.

The takeaway

Skyworks will continue to capitalize both horizontally and vertically in most, if not all, of its markets. The demand for sensors and semiconductors will increase over time as the world becomes increasingly connected. Consequently, I expect the Skyworks' share price to rise significantly over the next several years, as it has the opportunity and means to meet the increasing demand for semiconductor and sensor technologies. Despite the stock trading near 52 week highs, it remains a solid buy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.