It is said that in order to gain the maximum, one needs to be in the right place at the right time. This old but brutally true maxim seems to be coming true in the case of Skyworks Solutions Inc. (NASDAQ:SWKS), which saw its share price rise following higher price targets from Fox Business Network and Topeka Capital Markets. One of the best performers in this earnings season, Skyworks has garnered positive reception from investor and analyst communities. A burgeoning mobile market and a trillion dollar opportunity presented by Internet of Things (IoT) could drive the stock higher in coming quarters.
Before we jump into discussing the massive potential of mobile market, let us revisit the Q3 results of the company. The revenue for third quarter came in at $587 million, up 35% y-o-y and 22% sequentially, conveniently exceeding the revised guidance given by the company. A strong topline growth translated into a 60% y-o-y jump in operating income (on a non-GAAP basis) and a non-GAAP EPS of $0.83 per share as compared to $0.54 in the prior year period. The company generated close to $200 million in quarterly cash flow on the back of a strengthening IoT drive by capitalizing on the need to connect virtually everything and everyone.
Internet of Things: Apple and Skyworks
One of Skyworks’ star customers is Apple (NASDAQ:AAPL) as the former supplies chips for internet-enabled smart devices and it is highly expected that Skyworks might be the one to supply RF chips for Apple’s iPhone 6. Now, a partnership between these two companies is quite significant in light of the opportunities thrown up by the Internet of Things. Apple, which had already expressed its strong intent to enter and leverage the IoT opportunities by making devices that will be able to control various internet-connected devices, is going to be a major beneficiary of this virtual revolution.
On the other hand, Skyworks has already been working on positioning itself to leverage from the Internet of Things. The company’s line-up of products clearly illustrates the fact that the company has aggressively invested in creating and delivering custom solutions to its clients. For instance, in the second quarter of 2014, it supported Audi’s Homelink programmable car system that allows you to control garage doors, gates and also the lights in your home by using three simple buttons in your car. In this quarter as well, the company landed design wins with Harris Corporation for joint tactical radios. Harris Corp. is a leading global supplier of secure radio communication solutions for the military and serves clients ranging from the U.S army to Royal Brunei armed forces. Therefore, this deal would allow Skyworks to build a sustainable book of clients for its products.
The Panasonic venture
The company recently entered into a joint venture with Panasonic to work on enriching system capabilities, extending its technology portfolio, and enhancing financial performance. In fact, Skyworks' management expects the Panasonic deal to become immediately accretive to its gross margin and earnings.
Together, Skyworks and Panasonic will work to develop high-performance filters. The chipmaker expects to benefit from 412 fundamental filter patents, plus patent applications held by Panasonic's filter division. These filters are used in electronic devices for signal processing, removing interference to enhance and deliver the required frequency, which is why they are gaining adoption in IoT.
As there will be 50 billion connected devices by 2020, according to Cisco, the need for such filters will increase to remove interference in connectivity.
If you were thinking that Skyworks has already reached the pinnacle of its potential and on way to see sluggish operations in future then think again. The fourth quarter guidance given by the company looks upbeat with an expectation of 43% y-o-y surge in revenue to $680 million and 56% increase in non-GAAP earnings per diluted share to $1.00. The company believes that its strategy of diversifying and expanding its business will be the essential growth driver in the long term. Based on its product innovation and broad customer demand, the company is in a position to generate above-market returns in the future.
There could be no second opinion that Skyworks has not only a solid past but an attractive future and yet it trades cheap at a forward multiple of around 15.2 as compared to an industry average of around 18. Also, it has a PEG ratio of just 1.62 against the industry average of 2.20. Additionally, Skyworks boasts of a fine balance sheet with no debt and almost $900 million in cash. All in all, this stock is an ideal candidate for your portfolio.