Skyworks Solutions (SWKS) manufactures chips that enable wireless connectivity, therefore, the company has got huge market to be addressed in the future as the consumption of data is expected to multiply. Skyworks is performing brilliantly this year with shares appreciating more than 45%. The company has also gained smartly from its supplier relationships with Apple (AAPL) and Samsung. So, despite handsome gains in the current year so far, Skyworks still has room to gear up.
Strong results set the tone for growth
The strong sales of chips used to connect machines to the internet has led to Skyworks outperform in the second-quarter results. The revenue for Skyworks increased 13% year over year to $481 million. Moreover, the operating income also rose 31% to $130.4 million on a non-GAAP basis. Regarding earnings, its EPS appeared at $0.62 per share, exceeding the consensus estimate of $0.59 per share. Going forward, the company expects robust demand for its chips that should help it sustain its consistent performance.
Skyworks expects an improvement in its performance with the booming smartphone market and customers shifting toward smartphones from budget phones. The company is balancing its analog design expertise and is also targeting on expanding its product portfolio by bringing out new products.
The increasing acceptance of 4G LTE is a big boost for Skyworks. The company expects this segment to expand in the future, particularly due to LTE deployments in Asia. Skyworks hugely expects from the Asian market. The company is bullish about this market and its views are supported by Credit Suisse, which estimates that within next two years the number of LTE connected smartphones in Asia will grow by over 70%.
Skyworks eyes on capturing the huge smartphone market of China which is one of the largest smartphone markets in the world. Skyworks' management found out that almost 80% of phone users in China are currently on a 2G device and expects these customers to move to the latest technology in the future, resulting in an increase in demand for connectivity chips. Also, according to Morgan Stanley the number of connected devices is expected to reach 75 billion globally by 2020.
Skyworks is aiming on benefiting from these attractive growth projections with its 802.11ac Wi-Fi chip. This chip is expected to support several connected applications such as set-top boxes, Blu-ray players, 4K televisions, and 4G LTE services. Hence, being a supplier of connectivity chips, there are several opportunities for Skyworks to enhance its sales.
A strong growth driver
Also, Apple is one of the key customers of Skyworks. The growing LTE environment is expected to benefit both companies. Apple now has an opportunity to sell its iPhones to more than 780 million subscribers after striking a deal with China Mobile. Also, Apple's possibility of benefiting from the Chinese market should multiply if the smartphone company releases a phablet in the future.
Nearly, 40% of the customers in China are buying Phablet and hence pushing its sales. Apple is rumored to be preparing a 5.5-inch device for launch to profit from this market. But, if this comes true with time, then Skyworks would gain promisingly.
The P/E ratio of 26 for Skyworks in the present trading session looks slightly overvalued. But, there are several good catalysts that could enable Skyworks outperform in the future. The diversification of operations by the company and expectations from the growing LTE platform could lead to long-term growth. Further, the earnings of the company are expected to grow at a steady rate of 16.87% for the next five years. Hence, investors should invest into the stock and capitalize upon this growth opportunity, even though they need to pay a slight premium for the stock as it looks promising.