They do about 20% of their sales with Apple as I remember.
Per the most recent 10-K, for 2015 Foxconn represented 44% of revenue. Presumably, most (and maybe all) of this was Apple…and most (but not all) of that was iPhone.
What portion of SWKS revenue comes from smartphones?
I’m curious why you asked this.
Is it fearing that there is risk in having a large percentage of revenue from just one product category?
IIRC, about 70% of revenue is from pocket computers…I mean smartphones. And that’s likely to increase.
So is this a worry? I don’t think so. For there is not much in the business world that is more certain than the fact that pocket computers 1) are here to stay, 2) that there are still billions who do not have one, and 3) of those that do, there are billions who do not yet–but eventually will–have 4G (which represents about triple the revenue per phone vs. 3G). Frankly, I find comfort in owning a business that relies on this tsunami.
Morningstar’s DCF model puts fair value at $92, although with a fair amount of risk around that value. Rates SWKS 4-star (out of 5)
Honestly, if you believe that some guy at Morningstar understands a business better than you, then indexing may be a better option. Long ago, I used to put weight in Morningstar. But then I found that they more often guided me wrong than right.
The rumor is easy to ignore. Less easy to ignore is why, in spite of the stellar quarterly reports, SWKS has declined by about 35% over the past six months while the S&P 500 has declined by about 4%. Is this Apple contagion… a cyclical stock being cyclical… an out of favor sector… or something else?
While it is very important to always think about whether or not there is some substantive business problem that is leading the stock lower, you’ll have a very hard time with successful investing (and will miss some of the very best opportunities) if you let Mr. Market inform you, rather than take advantage of him. This is Ben Graham and Warren Buffett 101. As often as not, there is no good reason why a stock is down. And once it goes down a fair amount, then it often goes down much more simply because (as you may be doing here), people get freaked out when a stock is collapsing…assuming there must be bad news.
So, how is Mr. Market failing with Skyworks?
-
People perennially are paranoid about Apple’s future (wrongly…iPhone is stronger now than ever before)…and since they tend to equate Skyworks with Apple, then when the market is down on Apple, this spills over to SWKS,
-
people fear that the pocket computer (smartphone) market is approaching saturation, so SWKS growth will plateau. What they are failing to understand it that 4G is in early innings, and 4G leads to multiples of revenue vs. 3G/2G,
-
I suspect many view Skyworks as just a commodity widget maker. Yet they fail to appreciate that it has instead become one of only a few businesses that are intergrated-system and solutions providers,
-
they worry that if Skyworks lost Apple, they’d get hammered. But what they fail to realize is that Skyworks is more important to Apple than vice versa. iPhone accounts for the overwhelming majority of Apple’s profits. The solution that Skyworks provides is absolutely critical to the performance of the iPhone, yet it is an absolutely tiny portion of the bill of materials. So why in the world would Apple take the risk with an alternate supplier…who would have a significant risk of not being reliable to provide a quarter of a billion units over the next year? Certainly not to save $1. So unless someone comes along able to offer a dramatically better offering (which is extraordinarily unlikely), this won’t happen. Moreover, it’s not happening in the next two years, period? How do I know? Because Apple is already done designing the iPhone 7 and 7S, and if Skyworks wasn’t in that, Skyworks would not be upping all of their earnings estimates for the next two years. Indeed, I suspect that they are already collaborating with Apple on iPhone 8…as well as Apple Watch with cellular (go back and read last conference call questions, where CEO discussed “wearables”.)
-
Well what about the threat that Qualcomm will take over by integrating all the Skyworks functionality with their cellular chip? Could happen, but I think very unlikely. First of all, Skyworks has been building expertise for this over many years; why should we think all of a sudden Qualcomm can do better? Maybe more importantly, I think Apple understands that it would absolutely not be in Apple’s interest to have Qualcomm develop even more market power than they currently have. Indeed, there are credible rumors that Apple is working on designing their own cellular chips, which would make them even less likely to choose Qualcomm over Skyworks.
Bottom line, this panic over Skyworks is presenting an outrageously attractive price for an outrageously attractive business. I’m right there with Saul in making this my #1 position, and a large portion of my portfolio. When you get a pitch this fat, if you don’t load up, you won’t profit much. For someone buying in the mid-60’s and holding for a long time, this will likely end up being one of the best investments of your life. And the realistic worst-case scenario? Likely just dead money for a prolonged period. The thing I fear the most is that someone will come and acquire them for a 50% premium over this crazy-low price.