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Why Skyworks Solutions Looks Set For A Good Run

Amigobulls profile picture


  • Skyworks shares have enjoyed a great run over the last five years.
  • While there are risks, the rally is backed by solid fundamentals.
  • The opportunities ahead make Skyworks a compelling investment option.

Shares of Skyworks Solutions (NASDAQ:NASDAQ:SWKS) have delivered an eye-popping 252% return over the last five years, implying that investments in the stock have swelled 3.5 times in value. Often, returns as massive as these can dissuade investors from initiating fresh positions. However, Skyworks is one of those businesses that have backed superior returns with a strong performance. The company's financials across the board justify the returns that investors have enjoyed. And though the stock currently trades at seemingly pricey valuations, it looks set for a good run in the medium to long term.

Numbers And Fundamentals

If you look at Skyworks' financials over the preceding five years, the numbers are quite impressive. Consider the latest quarter March ending and compare that with the same quarter in 2012. Skyworks' revenues have multiplied 2.3 times over this time period. What's really been most impressive, though, is how margins have expanded across the board, especially at an operating level. While gross margins have expanded from 42% back then to 50% in March this year, operating margins have expanded from 12% to 33%, and net margins have swelled from 9% to 26%. All of this has resulted in massive growth in profits.

While gross profits have multiplied 2.8 times, operating margins have increased 6.4X and net profits have increased 6.6 times. It's worth noting that the pace at which profits have grown has clearly outpaced the rate of growth in valuations so far. Looking beyond the top and bottom line numbers further bolsters faith in this narrative. There's very little debt on the books, and cash flows have grown at a good clip too. While operating cash flow (OCF) has increased 2.8X between FY 2012 (Sep ended) and FY 2016, free cash flows have increased 4.7 times. OCF, which stood at 1.1 times net income for FY 2016, stands at 1.5 times net income for the latest six

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Analyst’s Disclosure: I/we 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.

This article was written by Vikram Nagarkar, an equity analyst at Amigobulls. Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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Comments (5)

From EE Times June 22, 2017

Handsets Expected to be Largest Market for ICs
Dylan McGrath

AUSTIN, Texas — Sales of chips for cellular handsets will surpass sales of chips for PCs for the first tine in 2017 as the PC sales slump continues and tablet shipments also plummet, according to market research firm IC Insights Inc.

Sales of ICs for handsets are projected to grow 16 percent this year to reach $84.4 billion, according to IC Insights. Meanwhile, sales of ICs for PCs—including desktop and notebook computers, tablets and ultra-thin Internet-centric client devices—are forecast to grow 9 percent to reach $80.1 billion, the firm predicts.

Booming memory chip prices will boost growth in both phones and PCs, IC Insights said. But by virtue of the higher growth rate, handsets will become the largest application for ICs this year for the first time, according to the firm.
Huawei, one of swks' client, is growing rapidly in Asia and worldwide, the reliance of swks on apple will reduce significantly which is a good sign. Not to mention Samsung is another client of swks, too.
Skyworks' net profit in the last 4 quarters was $914.5 M, or 27.27%, which is 154% higher than the 12.76 % average profit margin in the Semiconductor industry. Marketgrader calculates the company's optimum P/E at 29.00 based on the company's annualized growth rate over the last five years, which makes the stock look cheap at current valuations. It's interesting to me that Apple has so much control over SWKS future, yet it doesn't exert more pressure on its prices. Do other companies offer the same type of semiconductors as Skyworks or is their product protected by a wide moat? To me that seems to be the most important factor unless SWKS expands its market. I don't know the answer, but I hope someone can tell me. Thank you.
There are other companies that purport to do the same thing skyworks is doing but I think Skyworks has a rather large moat.

The thing about the products skyworks is making is that quality and performance of the product is of paramount importance and the performance characteristics of their chips are complex and are not usually discussed in public filings.

But clients definitely know how to measure performance and keep choosing skyworks. So in general I think skyworks' ever climbing revenues combined with their ever climbing gross margins in a business that is notorious for price competition and margin squeezing by powerful clients are the best evidence that skyworks has a significant competitive advantage.

And that is also why Apple doesn't exert more pressure on prices. There are no competitors able to deliver the same performance for those chips.

SWKS has a couple of competitors. One of them -- AVGO, is known for making very high quality filters, but Broadcom is quite content to stay in their corner of the market (the very expensive and high margin BAW filters) and let SWKS have everything else. Another competitor is QRVO, but if you look at their financial performance, it is clear that QRVO's chips are not as good as SWKS's. This is confirmed if you look at design wins -- QRVO keeps winning the cheap 3G chips on price while SWKS wins the high spec 4G chips.

Probably the scariest competitor right now is Qualcom. Qualcom has been trying to muscle in on SWKS turf now for several years. But they have not managed any significant success yet. Qualcom is very good in the digital parts of cell phones, but analog is very different than digital, and it is also very difficult. So I would not fear Qualcom unless they show more success.

Overall, I would say that SWKS moat is very good.
In addition, regarding P/E ratios, I think for a company that is followed by many reputable analysts, the forward P/E is a better way to judge valuation. SWKS forward P/E is 13.5, so it is still rather cheap for a leading semiconductor company growing at 10% per year.

Of course if the new iphone is a hit as everyone expects it to be growth should accelerate pretty soon. In the medium turn, the switch to 5G should improve growth.
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