After reporting stellar quarterly results at the end of April, Skyworks Solutions Inc (NASDAQ:SWKS) looks positioned to continue climbing and we predict similarly positive news when its reports for its third quarter on July 20.
Skyworks Solutions, which is best known as a supplier of chips used in Apples iPhone has been quickly expanding into other markets, such as home automation and driverless vehicles, and its products are becoming increasingly critical as technology companies look for innovative ways to connect their devices.
Skywork Solutions is a semiconductor specialist that supplies chips to a wide variety of markets, including: mobile, automotive, broadband, wireless infrastructure, home automation, industrial and military. Its chips are used in wireless devices to support in sending and receiving data.
Its products include: power amplifiers and front-end modules used by mobile device companies as well as RF chips used in a variety of industries.
The company reported strong second-quarter results on April 27, beating analysts estimates for earnings and revenue, and raising guidance. The company generate revenue of $851.7 million, up 10% from the same period the previous year. While earnings per share rose to $1.45, a 16% increase from the year-ago quarter.
Due to several new contracts, the company revised its guidance for the following quarter to a revenue of $890 million and non-GAAP earnings per share of $1.52. This represents a 18% revenue increase and 23% EPS increase compared to the same period the previous year.
Skyworks credited its strong return to the success of several new product launches, including components used by Huawei in its P10/P10+ smartphones, in Samsung Electronic’s (OTCMKTS:SSNLF) Galaxy S8 platform, Cisco Systems, Inc.’s(NASDAQ:CSCO) enterprise-grade MIMO gateways and Nintendo Co.’s (OTCMKTS:NTDOY) Switch gaming consoles.
The company also secured several design and networking contracts that should boost revenue in the upcoming quarter. The company won contracts with three leading auto manufacturers to provide advanced LTE modules, supporting high-reliability connectivity, GPS and data transport capability. In addition, it extended WiFi mesh networking contracts with Google and Plume.
There are a number of positive trends that make us bullish on SWKS stock. First, is the increase in spending by technology companies on internet infrastructure which will boost sales for its suppliers. The internet of things (IoT) is expected to be one of the biggest trends in tech, and with more and more devices being connected to the internet, Skyworks will benefit immensely.
Gartner estimates there will be over 8.4 billion connected devices worldwide by 2017. This includes growth from wearable devices, connected cars, drones, smart speakers and home automation devices, among others.
Another boost for Skyworks is the upcoming launch of Apple’s iPhone 8. Skyworks is a major supplier for Apply (in 2016, approximately 40% of Skyworks’ revenue came from Apple). Additionally, newer smartphones requiring a greater number of the Skywork components due to their technological advancements.
For example, the iPhone 6s requires two Skyworks components versus the latest model, the iPhone 7, which requires four components. As the technology in phones continue to improve, Skyworks components will comprise a larger content share and push sales higher, even if phone sales are flat.
At its current valuation Skyworks is an attractive option compared to other semiconductor providers. Skyworks trades at a price-equity ratio of 20.51x versus the industry average of 24.23x. At the same time, the company touts’ revenue growth of 18.31% versus 10.06% for the industry average and maintains a healthly balance sheet.
There is a lot to like about Skywork solutions; the stock is up 33% YTD, but we see more upside as the company continues to win business with other electronic manufacturers and expand its customer base.
The improvements in technology in smartphones and other connected devices will boost sales for semiconductor providers, and Skyworks has a strong reputation in the industry. At its current valuation, we are bullish on the stock and expect the company to report another strong quarter in July.
As of this writing, Don Dion did not hold a position in any of the aforementioned securities.