The shares of one of the leading manufacturers of high performance analog semiconductors i.e Skyworks Solutions (SWKS, Financial) have almost doubled since the beginning of the year, resulting in attractive gains for the shareholders. The stock saw some selling activity even after reporting record Q4 results and hiking the dividend to $0.13 per share that is around 18% more than the previous quarter. Analysts have cited profit-booking as one of the primary reasons behind this selling session. However, the massive opportunities embedded in the growth of mobile and Internet of Things, Skyworks looks to be in a good position to make big gains. Let us analyze and see if the stock has run out of steam or if it has the potential to grow further.
A glimpse of the results
Before we go on to do a detailed discussion about the prospects of Skyworks, let me first give you a glimpse of the Q4 results. In the fourth fiscal quarter, the company recorded a revenue of $718.2 million which represents a 51% increase Y-o-Y and 22% sequentially. The revenue was in alignment with the consensus estimate and also came well over the company’s original guidance midpoint of $680 million. On a non-GAAP basis, operating income for the fourth fiscal quarter of 2014 was $235.7 million, up 81 percent from$130.3 million in the fourth fiscal quarter of 2013. Non-GAAP diluted earnings per share for the fourth fiscal quarter of 2014 was $1.12, including a $0.03 fiscal year-end tax benefit, which beat estimates by $0.04. On a GAAP basis, operating income for the fourth fiscal quarter of 2014 was $198.1 million and diluted earnings per share was $0.90.
Handset gains
Skyworks has been garnering strong growth in the handset market by supplying radio-frequency chips to mobile giants that include Apple and Samsung. In fact, the growth in the revenue can be attributed to the tremendous growth witnessed by the smartphone segment and considering that Apple (AAPL, Financial) and Samsung occupy a majority share of the market, it is not hard to decipher Skyworks’ revenue growth. In a report that came out a week earlier, Barron’s highlighted the potential of RF Micro devices because of exposure to these tech giants as well as the burgeoning smartphone market in China.
In the article, the author has quite rightly pointed out that the OEMs in China are not waiting for the full consumption of inventory but launching new builds/models to drive higher subscriber growth at China Mobile (CHL, Financial). At the moment, suppliers are expecting fewer than 250 million 4G units at China Mobile in 2015 (up from a 70 million-80 million unit target this year). Now, as the management pointed out in the earnings call, Skyworks has great partnerships with leading global chipset providers. Alongside these partnerships, the company also has considerable associations with local brands like MediaTek and Spreadtrum (SPRD, Financial). Additionally, the rollout of 4G LTE is a big growth driver for Skyworks. In the fourth quarter, the company already commenced volume production of custom 4G/LTE modules by leveraging the proprietary TC-SAW filter technology. Therefore, it is safe to assume that Skyworks has potential to achieve considerable revenue in the region.
Why IoT can be a goldmine for Skyworks?
Now that we have discussed the position of Skyworks in mobile, let us talk about the Internet of Things (IoT). Though the immense potential that this market represents, has not materialized into revenue gains, the momentum building in this segment may help Skyworks smooth out the seasonal bumps in its core cellular business. The company clearly called out the extreme significance of IoT opportunity wherein it can enable the next wave of connected devices through their industry-leading connectivity solutions. I say this because the IoT concept is introducing whole new categories of devices that include refrigerators, security cameras etc. to be connected using the internet.
Now, these categories of new devices (new to the concept of all-time connectivity) provides considerable growth avenues for the company. The biggest advantage is that Skyworks can compensate for periods of low growth in the cellular supply market by leveraging opportunities in the IoT segment. Also, Skyworks’ biggest clients that is Apple and Samsung are also investing commendable efforts into the IoT market by focusing on wearable technology. This is also a point that should be noted by the investors.
Takeaway
Fundamentally, Skyworks has reasonable potential owing to its position in the cellular supply market as well as the IoT space. Also, the company’s valuation is impressive as the stock is currently trading at a forward multiple of approximately 15.2 with no debt at all. Its PEG ratio is also a favourable 1.68 as compared to an industry average of 2.19 and as per analysts, the earnings growth is forecasted at approximately 16.70%. Though investors triggered a selling session after the earnings in order to book profits I believe that Skyworks hasn’t run out of steam yet and the pool of opportunities lyinh ahead of it definitely make it a worthwhile investment.
