Most tech analysts have talked about the Internet of Things in an elaborate manner and I believe that they have spelled out each and every aspect of this revolutionary business phenomenon. As such, I will abstain from revisiting the same details but discuss the prospects of Skyworks Solutions (SWKS, Financial), a potential gainer from the IoT. Known popularly as a supplier of Radio Frequency (RF) chips to Apple (AAPL, Financial), Skyworks is a company whose operations perfectly align with the opportunities embedded in the IoT revolution.
In the past 12 months, the stock has appreciated a whopping 145% and this has raised questions about its momentum. It is appalling to see that the 52-week range of the stock is $27.2 - $71.32. Undeniably, the growth has been phenomenal for Skyworks and the launch of Apple’s iPhone 6 and 6 Plus has been a big growth catalyst for the company in the past quarters. As a matter of fact, this Apple supplier has outperformed Apple as well as broader market in the past months.
The grass is green everywhere
Skyworks is at the heart of Internet of Things because of its product portfolio which includes almost everything from wireless amplifiers, RF switches to attenuators, conversion mixers etc. The breadth of Skyworks’ product portfolio is the reason that the stock has escalated exponentially in the past quarters as investors continue to bet big on the Internet of Things. Skyworks generates about a quarter of its revenues from its Broad Markets division, which encompasses IOT devices such as networking, alarm systems, wireless lighting and automotive collision avoidance systems. The other 75% is split evenly between its Integrated Mobile Systems and Power Amplifiers divisions.
This most recent quarter saw Skyworks’ revenue climb 51% from the previous year, to $718 million, all while improving operating margins by nearly 200 basis points. The company produced operating income of $236 million. That's up 81% versus last year. This is a clear indication that the company is not being valued only for the immense potential it exhibits in the IoT domain, but also for its consistent performance. As I mentioned above, the launch of Apple’s iPhones benefitted Skyworks in a big way in the previous quarters.
Analysts at Morningstar estimate that Foxconn, which manufactures most iPhones and iPads, represents about 36% of Skyworks Solutions’ revenues. They also point out that while that relationship continues to strengthen and growth remains strong, Skyworks’ bid to enter into the IoT markets is a big positive. It is worthwhile to note that while Apple is a big growth catalyst for Skyworks, it is not the only one. For Skyworks, there are opportunities in both the worlds of IoT and smart devices. In fact, both of these domains are so integrally linked that we can call IoT the next step in the mobile revolution, where the idea is to connect all devices via the internet.
Skyworks is in the sweetest spot it can be in because of its ability to be a one-stop shop for most of needs in mobile as well as other industries. For a company that is currently positioned to take advantage of numerous opportunities, the valuation also looks pretty healthy. The quick-paced growth in the past quarters has no doubt pushed up the valuation of the company but on the earnings side, Skyworks has also done well to keep track with the growth.
Valuation and final take
According to Yahoo! Finance, the current P/E (ttm) for Skyworks stands at approximately 29, whereas the forward P/E stands at less than half of this number, at around 14. This clearly demonstrates that the company as well as the analysts are expecting through-the-roof growth in earnings over the next quarters. Additionally, the PEG ratio of the company stands at 1.80 based on a five-year forecast. This again indicates that the price is also expected to grow at a similar rate as earnings in the coming period. These numbers clearly tell us that though Skyworks has grown phenomenally in the past 12 months, it is still fairly valued. The reason behind this is that the company is also delivering sustainable growth and expects to grow its profits by around 50 percent in the coming quarters. As such, the stock still remains a fairly valued one after rallying to this price.
It is true that Skyworks has exhibited extraordinary growth but I believe that the bull run for the company isn’t over yet. This is because the company is still entering the land of opportunities where it can generate better value for shareholders. Also, the valuation of the stock remains healthy and provides a good entry point for prospective investors.
