Skyworks Stock: It’s a Good Time to Buy (NASDAQ:SWKS)

There are many reasons to like Skyworks (NASDAQ:SWKS), from exposure to 5G and IoT to the excellent profit margins and growth it offers. One reason that is particularly relevant right now is its rating, which has become very attractive, especially compared to the market in general and its sector in particular. It’s not surprising that Seeking Alpha gets an Excellent score at around half its sector median.

There are a few explanations for the low valuation, one of which is that many investors are concerned about its significant reliance on its largest customer, Apple (AAPL) and fears that it may one day switch to another provider or try to develop replacements itself. This is a real threat. Bloomberg for example reported some time ago that Apple hired RF engineers to develop wireless chips that could eventually replace components from companies like Skyworks and Broadcom (AVGO). While this is a real risk that should be taken seriously, we believe it would be more difficult for Apple or other customers to do so than many seem to believe. For starters, they could infringe one or more of Skyworks’ approximately 4,600 patents and trigger costly litigation. They would then have to find someone to make these devices for them, which isn’t as easy as it is with digital chips where they just have to call TSMC (TSM). Skyworks operates its own specialized factories and there are few companies with the expertise to manufacture state of the art RF equipment. As a result, it may be more cost-effective for Apple to continue to rely on established vendors like Skyworks.

Another reason stocks have been under pressure lately is that the smartphone market has been very weak. Some in the industry are saying This recovery is not likely until late 2023. While that may be true and the smartphone market could remain weak for some time, we believe it will eventually recover and that will be less of an issue for Skyworks given its 5G tailwind. With the transition from smartphones to 5G, Skyworks has a larger content opportunity per device as 5G smartphones require far more RF components.

finance

The company has excellent finances. Few companies in the world have such high profit margins. One small detail we would like to point out is that the following numbers are not GAAP compliant.

GAAP gross margin is closer to 47% and GAAP operating margin is closer to 29%, due in large part to stock-based compensation. Still, these are excellent profit margins and show that Skyworks is a great business.

Growth through 5G

Skyworks has benefited from growth resulting from the 5G transition. With each new generation, RF complexity has increased, resulting in increasing content possibilities for Skyworks. The company therefore capitalizes on these trends in each upgrade cycle as it sells more RF components per phone.

diversify income

Skyworks has also worked very hard to diversify its revenue from Apple and from smartphones in general. It has products targeting IoT, automotive and industrial applications, etc. Another area where Skyworks shines is in infrastructure. The company recently unveiled its AccuTime and NetSync clock and timing portfolio. As the industry transitions to 5G core infrastructure, these solutions will become increasingly important. The need for tighter clock solutions that sync at the base station and all the way back to the network is a greenfield opportunity for Skyworks. All of these examples are part of what the company refers to as “Broad Market” revenue, and they now account for more than a third of total revenue and have grown at an impressive CAGR of ~17%.

One of Skyworks’ most impressive new offerings is their complete, automotive-grade RF front-end system. This system includes all low, mid, high and ultra high bands for 5G, all powered by vertically integrated Skyworks technology. The company also has circuit breakers and timers for the automotive market. With all of these factors combined, the company is looking at a content opportunity of ~$60 per vehicle and already has some of the largest automakers as customers. At a recent investor conference The company said they are seeing tremendous growth from what they consider to be the top EV manufacturer in the world. It sounded like they were talking about Tesla (TSLA), and most importantly, they mentioned that the content per car is also increasing:

So it’s a little scary considering how fast this business is really growing. And we’re tied to the number one — which I consider the number one EV manufacturer in the world. We hooked up with them early on, and we’re sticking with them because they’re growing fast, not just in units but in content. – Carlos Bori, Senior Vice President of Sales and Marketing

Skyworks is also focused on the transition to the more advanced WiFi 6E and WiFi 7, which require new BAW filter technology, more gain and low-noise amplifiers. They have a strong partnership with Broadcom and recently announced a collaboration with them on a new line of products called Sky ICE, which has incredibly low power consumption.

dividend growth

Skyworks is an excellent dividend growth investment with 8 years of dividend increases at a ~20% CAGR. As the payout ratio remains modest and the company continues to grow at a good pace, we think it’s likely that the dividend will grow at a very good rate for a few more years.

valuation

As we said at the beginning of the article, we like to buy straw hats in winter when they are very cheap. We believe that the headwinds currently affecting the smartphone market will eventually ease and Skyworks shares will likely be valued higher at that point. Meanwhile, stocks can be bought at some of the lowest valuation multiples in the last decade. As can be seen in the charts below, stocks can currently be bought at multiples below the 10 year average of EV/Sales and EV/EBITDA.

Considering the price-to-earnings ratio and the price/free cash flow shows the same undervaluation.

Meanwhile, stocks are near their highest combined net dividend yields in the past decade. As a reminder, the combined net distribution yield combines the dividend yield and the buyback yield.

risks

As we mentioned earlier, the company faces customer concentration risk, which is probably one of the main reasons investors are unwilling to pay a higher multiple. The risk is particularly important given the rumors surrounding its biggest customer, widely believed to be Apple, trying to develop its own RF devices.

Another thing to consider is that the bulk of their revenue still comes from the wireless segment, which is expected to decline sequentially. This risk is partially mitigated by strong growth in broad market revenue, which now accounts for more than a third of total revenue.

Conclusion

We believe the headwinds Skyworks is currently experiencing will be temporary and will eventually dissipate. While there are some important risks to consider, stocks have rarely been this cheap. As such, we believe now is a good time to buy the shares. The company is also showing excellent growth in its broad market segment with many interesting and high-growth applications. The company’s devices can now be found not only in smartphones, but even in Tesla cars, wireless accessories, etc. The company has excellent financials and a very strong IP portfolio, and it has had good growth for many years, albeit growth can be cyclic. We believe equities are a “strong buy” at the moment.