The Radio frequency (RF) chips manufacturer Skyworks Solutions (SWKS, Financial) has had some bad luck this year because despite three straight quarters of solid results, the company’s shares have appreciated only 10%. In the past, the company’s performance has been directly linked to Apple’s (AAPL, Financial) performance, as it was considered an Apple supplier.
Is it just an Apple Supplier?
Apart from having Apple as its client, the company has other major mobile companies using its products, such as Samsung (SSNLF, Financial), Nokia (NOK, Financial), and LG, with Samsung becoming the most important component of Skyworks' sales. Further,Cisco Systems (CSCO, Financial) employs Skyworks’ processors for its wireless routing range. Giants like General Electric (GE, Financial) and Philips build medical devices using a range of Skyworks’ products.
Skyworks also supplies its chips to car makers and expectsallcars to get digital communications built into them in the next five years from the current 5%. The company is well equipped to provide ready products in various fields such as medical, industrial, military, infrastructure, and smart energy. Thus, going forward, the company’s performance is nowhere centered on how an iPhone or iPad does, as it is consistently adding to its client base while maintaining strong relations with the current clients.
An important thing about any business is how well you meet your customers’ demand. The reason Skyworks is preferred by customers like Apple and Samsung is because it often provides tailor made solutions, i.e. delivering single chips to perform multiple functions compared to its rival processors. If the company maintains this edge, it is poised to succeed no matter which company runs the handset or tablet market in the future.
The growth from China
There is a tremendous boom for smartphones in the Chinese market, thus providing incredible growth potential for the company. In China and other emerging markets, users are currently shifting to 3G devices, creating ample opportunities for Skyworks. The 3G chips carry high margins, and with a great opportunity from the Chinese smartphone market, the company’s top line should move north.
Further, once the transition to 4G devices starts in China, after China Mobile, the biggest telecom operator of the world and the market leader in China, successfully rolls out LTE across the country, Skyworks’ market should only increase further.
The Chinese market no doubt is huge, but Skyworks is expected to face competition from Spreadtrum Communications (SPRD), which supplies TD-SCDMA, the 3G standard used by China Mobile. Currently, Spreadtrum is a primary supplier to local Chinese firms and analysts suggest that it supplies to two of the biggest Chinese smartphone companies, Huawei and ZTE, which strengthens its position. It supplies primarily to the low-end smartphone makers in the Chinese market, which provides it a strong footing in the world’s largest smartphone market.
The company recently launched its dual-core 1.2GHz smartphone chipset for TD-SCDMA and EDGE in its attempt to maintain its dominance in the TD-SCDMA market. However, as even industry giants like Qualcomm are also targeting the high-volume low-margin, low range smartphone market due to the saturation of the high-end smartphone market, it might get difficult for Spreadtrum to increase its market further. The major concern for Spreadtrum remains its low margins, which might be pulled south once competition intensifies.
More opportunities
Traditionally, the second half of the year is considered to be better than the first for mobile chipmakers, as most of the mobile companies focus on the holiday season and come up with new products in the latter half of the year. More importantly, the company is concentrating on December as a number of smartphones and tablets powered by their products will be hitting the market. This will boost company’s top line.
As the market for smartphones is expanding, so are the complexities attached with it. The company’s management itself mentioned that the complexities regarding RF are increasing; I believe as it has a broad portfolio of RF and analog solutions, its position should improve further. Further, as the company is diversifying, its market horizon should increase in the long-run along with its customer base and products. Further, as the business expands so will the top and bottom line.
Final words
Skyworks is going strong and with a positive outlook for the future it expects revenue of $535 milliion for the third quarter of 2014, ahead of expectations and highlighting a y-o-y growth of 23%. Further, with a PEG ratio 0.63, a solid clientele which is expanding, with quality products, it is poised to perform well in the future. As such, Skyworks makes a solid investment for long-term investors
