Why Skyworks Looks Like A Buy

| About: Skyworks Solutions, (SWKS)
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Radio frequency (RF) chip manufacturer Skyworks Solutions (NASDAQ:SWKS) has had some bad luck this year, because despite three straight quarters of solid results, the company's shares have appreciated only 10% while the NASDAQ is up 21%. In the past, the company's performance was directly linked to Apple's (NASDAQ:AAPL) performance, as it derived 29% of its 2012 revenue from the smartphone maker. Thus, any negative news regarding the iPhone manufacturer was not well received by investors.

More than an Apple supplier

Besides having Apple as its client, the company has other major mobile companies using its products, such as Samsung, Nokia, and LG, with Samsung becoming the most important component of Skyworks' sales. Furthermore, Cisco Systems employs Skyworks' processors for its wireless routing range. Giants like General Electric and Philips build medical devices using a range of Skyworks' products.

Skyworks also supplies its chips to car makers and expects all cars to get digital communications built into them in the next five years, up from the current 5%. The company is well equipped to provide products in various fields such as medical, industrial, military, infrastructure, and smart energy. Thus, going forward, the company's performance is nowhere centered on how the iPhone or iPad does, as it is consistently adding to its client base while maintaining strong relations with the current clients.

An important thing about any business is how well you meet your customers' demand. The reason Skyworks is preferred by customers like Apple and Samsung is because it often provides tailor made solutions, i.e. delivering single chips to perform multiple functions compared to its rival processors. If the company maintains this edge, it is poised to succeed no matter which company runs the handset or tablet market in the future.

Riding on China

There is a tremendous boom for smartphones in the Chinese market, thus providing incredible growth potential for the company. In China, there are over 300 million 3G subscribers currently, well over 2012's 175 million subscribers. Moreover, as the number of subscribers using 3G devices increases, there would be more opportunities for Skyworks. The 3G chips carry high margins, and with a great opportunity from the Chinese smartphone market, the company's top line should increase.

Furthermore, once the transition to 4G devices starts in China, after China Mobile (NYSE:CHL), the biggest telecom operator of the world and the market leader in China successfully rolls out LTE across the country by this month for public usage, it should improve Skyworks' market further. However, the exact dates about when the 4G service will be available are not clear, but it should be coming soon.

The Chinese market no doubt is huge, but Skyworks is expected to face competition from Spreadtrum Communications (NASDAQ:SPRD), which supplies TD-SCDMA, the 3G standard used by China Mobile. Currently, Spreadtrum is a primary supplier to local Chinese firms and analysts suggest that it supplies to two of the biggest Chinese smartphone companies, Huawei and ZTE, which strengthens its position.

The company primarily supplies to the low-end smartphone makers in the Chinese market, which provides it a strong footing in the world's largest smartphone market. Although Samsung remains the largest smartphone player in China with a 20% market share, there are nearly 400 other little-known makers in China, where two-thirds of the world's smartphones are made, thus providing huge potential going forward.

The company recently launched its dual-core 1.2GHz smartphone chipset for TD-SCDMA and EDGE in its attempt to maintain its dominance in the TD-SCDMA market. However, even industry giants like Qualcomm (NASDAQ:QCOM) are also targeting the high-volume low-margin, low range smartphone market with its Snapdragon 200 line of chips, which is a scaled down version of its Snapdragon 400, 600 and 800 chip series.

The Snapdragon 200 will support lower-end phones and are built using a 28-nanometer manufacturing process, featuring dual and quad-core CPUs. The chips will support two to three SIM cards at a time, a feature that is preferred among Asian customers. Growing competition remains a major concern for Spreadtrum going forward.

More opportunities

Traditionally, the second half of the year is considered to be better than the first for mobile chipmakers, as most of the mobile companies focus on the holiday season and come up with new products in the latter half of the year. More importantly, the company is concentrating on December as a number of smartphones and tablets powered by their products will be hitting the market.

As the market for smartphones is expanding, so are the complexities attached with it. The company's management itself mentioned that the complexities regarding RF are increasing; I believe as it has a broad portfolio of RF and analog solutions, its position should improve further. As the company is diversifying, its addressable market should also increase in the long-run along with its customer base and products.


Skyworks is going strong and with a positive outlook for the future, it expects revenue of $475 million and EPS of $0.62, both ahead of expectations as the company has some solid clients such as Apple and Samsung, while prospects in China also look great. Further, with a PEG ratio 0.63, a solid clientele which is expanding, and with quality products, it is poised to perform well in the future. With stronger expectations from the second half of the year and bright long-term prospects, Skyworks makes a solid investment for long-term investors.

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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.