Skyworks' Upped Guidance Is Good News For Apple:
Skyworks Solutions (NASDAQ:SWKS) recently raised its third-quarter guidance. The company now expects earnings of $.80/share, surpassing previous estimates of $.73/share. This represents a 48% year-over-year increase in earnings per share. Skyworks also anticipates revenues of $570 million versus previously projected revenues of $535 million. This represents a 31% year-over-year hike in revenue. By Skyworks raising its earnings and revenue outlook, this unveils a bit about Apple's (NASDAQ:AAPL) business. Skyworks supplies an array of components for Apple's iPhone, so if business is booming at Skyworks, then this is a good sign for Apple's future sales projections.
Apple And Skyworks Are Set To Benefit From The "Internet of Things":
Skyworks chairman and CEO, David J. Aldrich, stated "...Skyworks is capitalizing on the growing opportunity within the Internet of Things..." If you're not familiar with this rather ambiguous term, the "Internet of Things" is basically connecting everyday objects, such as appliances, to the internet, allowing them to be controlled from devices like smartphones and tablets. The IDC put the Internet of Things technology and service spending at $4.8 trillion in 2012, and expects the market to grow at an annual rate of 7.9%, becoming an $8.9 trillion market by 2020. At the Worldwide Developers Conference, Apple revealed its plans to capitalize on this rapidly expanding market. Apple stated people will now be able to use their iPhones and iPads to control various internet-connected devices in their homes, including appliances, thermostats, light bulbs, and door locks. In fact, Apple declared that appliances will be able to be controlled through a single app. As Apple senior vice president, Craig Federighi affirmed, "You could say something like 'Get ready for bed' and be assured your garage door is closed, your door is locked, the thermostat is lowered and your lights are dimmed."
As Apple leaps into the "Internet of Things" market and makes it more mainstream, Skyworks is already well-positioned and will become even more successful. Skyworks supports Audi's HomeLink, a programmable system which allows you to control your garage door, gates, and the lights in your home using three simple buttons in your car. Also, Skyworks supports HondaLink, a similar technology, which now comes standard in one of the top-selling cars in America and the top seller in Canada, the Honda Civic. Furthermore, Skyworks provides components for connected home solutions supporting security sensors, motion detectors, lighting controls, and meters at Centralite and Landis+Gyr. Additionally, Skyworks supplies components for General Electric's (NYSE:GE) appliances, lighting systems, and security systems. As Apple delves into the quickly growing "Internet of Things" market, making it more widespread, Skyworks, already a leader in the space, will continue to benefit from the increased customer base, therefore providing future growth for the company.
Apple Boasts "Best-In-25 Years" Product Pipeline:
At a time when Apple continues to lose smartphone market share to rival Samsung (OTC:SSNLF), the company's management knows it needs to be innovative now more than ever before. As Eddy Cue, Apple's senior vice president of Internet Software and Services, stated, "This is the best product pipeline I've seen in 25 years." When a prominent individual within a company makes a bold statement like that, it better come to fruition. Apple is rumored to be developing a larger display for the iPhone, which would include 4.7- and 5.5-inch display versions. By integrating larger displays into the iPhone, Apple will be better positioned to compete in the thriving phone tablet, or "phablet", market. According to a report by Canalys, smartphones with displays 5 inches or larger (phablets) accounted for 34% of worldwide smartphone sales in the first quarter. Overall worldwide demand for smartphones continues to increase; in the first quarter, there were 281.5 million smartphones shipped, which is up 28.6% from the 218.8 million units shipped in the first quarter of last year. Besides the much-hyped iPhone 6 and a refresh of the iPad, reports predict Apple will be releasing new products such as the iWatch and Apple TV. This new product development will give a further boost to Apple's sales. If Apple is able to deliver on the hype, then demand for its new products will skyrocket, benefiting Apple of course, but also Skyworks.
China Provides Growth For Both Apple And Skyworks:
Apple continues to grow its smartphone market share in China, and now owns a 7% share in the market. The company is the fifth-largest smartphone provider in China behind Samsung, Lenovo (OTCPK:LNVGF), Coolpad, and Huawei. Apple's deal with China Mobile (NYSE:CHL), China's largest carrier, with more than 760 million subscribers, is estimated to generate between 15 to 30 million additional iPhone sales this year. Also, phablet sales accounted for 39% of all smartphones sold in China, so if Apple does dive into this space with the iPhone 6, then the company will likely gain more market share in the country. Skyworks, of course, is positioned to capitalize on the growth of the Chinese smartphone market, not only because it supplies key components of the iPhone, but also because Skyworks supplies three of the four companies with a larger market share in China than Apple (Samsung, Lenovo, and Huawei).
Potential Risks To Apple And Skyworks:
Skyworks operates in a highly competitive marketplace, so if the company does not remain differentiated from its competitors, then it will have to compete on price, which will hurt margins. For Apple, the biggest risk at this point would be its product line not living up to its great expectations. If the iPhone 6 disappoints, iPad sales continue to slow, and if no new product lines are released, then the stock will be in for a large correction, one similar to the decline seen from late 2012 to early 2013, when Apple went from an all-time high of $705 to $385.
The Final Word:
The future looks promising for Apple and Skyworks, as both companies are very well-positioned to capitalize on the growth of the smartphone market in China and on the growth of the "Internet of Things". Even with both stocks trading around 52-week highs, I believe Apple and Skyworks are still undervalued.
Disclosure: I am long SWKS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.