I was asked this question off board and I felt I should answer it for the board as well:
Hi Saul, I am concerned about my large position in SWKS… Earnings upcoming on Thursday and analysts predicting a decline in EPS and revenue. I am worried about something like the INFN report and subsequent stock price decline…but don’t know if expectations are already baked in to stock price?..I am thinking about reducing my position prior to earnings release. Or even selling out entirely and reinvesting elsewhere. It’s totally up to me to decide what to do or not do. But I would very much appreciate your thoughts on this.
Here’s my response:
There are several different things to consider:
SWKS is a chip company, and historically chip companies can’t keep an edge. They live in a tough neighborhood with lots of competition. They make a physical product instead of software, and their physical product can become commoditized.
Management has been saying that they are different because they do analog, which many companies don’t, and they do complex solutions, and they can keep high margins because they provide a lot of value to their customers. Management seems very skilled and competent.
They have been in a revenue and earnings slump the past two quarters because of Apple’s slowdown, but Apple is gradually becoming less of their business.
Their price has already come down and they are only at a PE of 12. Their margins are much higher than INFN. They have much better view into the future than INFN had, etc. They have already announced and guided to a decline in rev and earnings in the June quarter, with a strong bounce back in the second half of the year, so I think that the chance of a total collapse like INFN’s is pretty small (nil, actually), although if they don’t beat guidance I could see a small decline. If they beat there could be a significant bounce, but it depends on what kind of mood the market is in that day.
To me a risk would be competition in general and especially if the Chinese start making their own complex chip solutions. Another risk would be if Skyworks changes guidance “Oops, we made a mistake, the second half of the year won’t be so good after all!” Although, if they say that they were just lowballing before, and that it turns out the second half will be even better than they said, the price will obviously take off.
As I’ve been saying I have been reducing my position in SWKS gradually over the past few months, partly at first because it was too big, but mostly because of #1 above, but also because of #3 and #5, and finally because I had other companies I wanted to invest in. I’ll probably continue to reduce, but I don’t feel any rush to do so, or to sell out my entire position in a hurry, but that’s just my way of looking at it and it could be entirely wrong, so please make your own decision.
Another risk would be if Skyworks changes guidance “Oops, we made a mistake, the second half of the year won’t be so good after all!”
This one is definitely my biggest fear with my SWKS position, but I’m going to wait on the earnings release before making a move. Too many times, moves I make the week of, or before, earnings releases end up working against me.
I’m hoping the forward guidance is still good (or even better than expected) and that’s what the market concentrates on.
Another way of managing these situations is to reduce one’s holdings to something less “concerning.” It shouldn’t be an all or nothing scenario. Reduce shares by a quarter, or a half, or whatever, and then either way you still partially win if it goes up or if it goes down.
As a general rule, if you’re worried about missing out on a big run up in a stock you don’t yet own, take a nibble. If you’re worried about getting clobbered or losing some gains, trim a little. You don’t have to go all in or sell completely out. It’ll do wonders for your psyche.
For SWKS, if the market likes the report, it’ll go up. If it doesn’t, it’ll go down. There’s NO way of knowing. Reduce your shares so your emotions can stay out of it, and you can objectively say you’re not just gambling one way or another. If the report is good and you want to keep your shares or even add, you can. If it sucks and you want to get out, you can. Either way, you’ll be able to make a more educated decision after the earnings report.
Another thing that was lost on me for quite a while was that I didn’t need to anticipate one way or another. Meaning, instead of trying to “get in” before the big move, it’s actually much safer to wait until you have some evidence of the move. While you won’t catch the bottoms or the tops, you can spare yourself a lot of headaches when the picture is a tad clearer.
Ok this is one of things I was worried about. Whilst could for the semicon industry and for Qualcomm, the revival of the Snapdragon 820 and licensee progress in China means more of the market is unavailable to Skyworks as Qualcomm does not use Skyworks but uses Avago etc for its analog and RF content…
This is the second time that you have stated that QCOM does not use SWKS for analog and rf content. I am under the impression that the phone OEM decides which analog and rf is used. Certainly, QCOM and AVGO are working together, however, SWKS is compatible with QCOM chips and I believe that some of the Chinese OEMs spec SWKS.
Can any of the smartphone techs set me straight on this?
Don’t Qualcomm and Skyworks chips appear together in the iPhone?
Yes but only the modem. Apple makes their own SoC.
Usually I’ve seen it where anytime a Qualcomm SoC is used there isn’t Skyworks presence in the teardowns. However the teardowns aren’t the be all and end all.
Ok this is one of things I was worried about. Whilst could for the semicon industry and for Qualcomm, the revival of the Snapdragon 820 and licensee progress in China means more of the market is unavailable to Skyworks as Qualcomm does not use Skyworks but uses Avago etc for its analog and RF content…
The licensee part is about royalty’s of Qualcomm’s LTE and other comm related patents (QTL segment). It doesn’t mean that licensees won’t be using Skyworks. In fact many Chinese OEMs do use Skyworks and will probably continue to do so.
On a side note the majority of Qualcomm’s operating income is from the patent licensing at 86% even though revenues is only about 33% of the business (high margins).