SWKS: Don't loose sight of the simple quest

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Something I’ve been contemplating lately, I’m curious to get input from others here: Maybe I’m totally off base with this, but it seems to me as if most people are asking the wrong questions when looking at Skyworks. Or perhaps not so much the wrong questions as questions that are too complex.

Analysts look at Skyworks and see an Apple supplier. They are concerned Apple’s poor performance projections will equate directly to poor performance for Skyworks. Fair enough. Apple used to be the source of the majority of income for Skyworks not so long ago and still is their largest customer.

A lot of individual investors, including on this board, see the opportunities for Skyworks to grow into Android phones and IoT devices. Opportunity for high growth is expected. Fair enough. This is, after all, the strategy Skyworks management has been pursuing in recent years.

Yet all this seems to me overly complicated when there is a very simple question that can be considered from both viewpoints:

Is Skyworks just an Apple supplier, or has Apple become just another customer of Skyworks?

What this means for me…

Thinking on this for my personal situation, I can only see this as a good position for me as an investor to matter what happens.

It seems to me we are at an inflection point where everyone (market, analysts, individuals, etc.) is balanced out, uncertain how to classify Skyworks in my question above.

What if Skyworks is still just an Apple supplier? Well, then my money is probably in a relatively safe location with minimal down side from the price today because Skyworks’ performance will somewhat match that of Apple, a large and relatively stable company. (Side note: I couldn’t care less about the price 12 months ago which a lot of people bring up). Meanwhile, there is still a possibility to transition to the second scenario…

What if Skyworks has been successful in their diversification and Apple is just another customer? Well, then my money is also in relatively safe location because because the current Skyworks price does not reflect a diverse and growing customer base, meaning I got into this investment with excellent timing.

Looking at SWKS from this perspective, I really have a hard time seeing anything but good news for my personal investment.

Thoughts?

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Oops, the title should have been: “SWKS: Don’t loose sight of the simple question” No clue how I chopped off those last few letters!

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Othalan - frankly if you want to be asking really simple questions I don’t see anything positive about Skyworks anymore. They are literally in decline QoQ YoY.
Why aren’t you asking why aren’t they growing considering, as they say themselves they can see the adoption years in advance and they have been talking about increasing component share and increasing customers constantly?
Why the frack are they declining if they are supposed to be growing is as simple as it gets and I can’t see them providing a satisfactory answer.
Ant

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Ant,

I’d love to hear how you think this is a simple question. I disagree that SWKS finances are a simple at all.

It is certainly worth keeping in mind. However, A transition as big and complex as Skyworks is making (away from Apple) is difficult at the best of times. Even more so in a tech company tied so tightly tied to a monolithic corporation like Apple. Even more so in the face of the economy these past months. In that environment, how do I possibly evaluate the numbers in a simple way???

Why are the decline? Maybe because the Apple is on the decline. Maybe because the long-term transition requires short-term expenditures. Maybe it has Skyworks is actually doing amazing but the overall economy means it doesn’t show in the company’s numbers. Maybe because Skyworks is about to implode and go bankrupt. Who knows? I don’t see any simple way to look at this.

Maybe I’m delusional. But that is the way I see it.

David

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Ant, By the way, just wanted to mention I’m serious wanting to hear more of your perspective. Always possible I am radically wrong. Its why I post on this board and why my position in SWKS isn’t bigger than it is.

David

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Hi Ant,
Good questions and the right questions. May I offer two hypotheses?

  1. With iPhone sales down the whole smartphone market is down. SWKS can’t make up for the lost sales in other phones because there are no other phone sales. Users just hang on to their phones longer. This is surely true for me. Unless the iPhone 7 gives me a good reason I’m not going to replace my 6 (and btw I don’t feel much of a difference to my company 6s). It works just fine. And whatever Samsung or Hyundai or whoever else comes up with: I’m not going to switch away from Apple (yet). That will only happen if Apple continues on its path to make its software more confusing.

  2. SWKS may make it into future items and phones (design wins) but they don’t get the space exclusively. As a result future sales are not as good as they may have anticipated.

If that is true it is difficult to value SWKS and historic growth rates may not apply.

LNS
no position

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Hi David and LNS

First off I wanted to point out that in part the POV I expressed in my post was around the subject at hand - i.e. the “simple” question about Skyworks as opposed to the broader subject of investing in Skyworks.

I’ve tried to explain my POV on this board and I find views on Skyworks too difficult to bridge on a logic front given the amount of vested interest and beliefs.

In the last post what I wanted to say is that to think about Skyworks on a really simple basis I just find it weird that everyone talks about Skyworks as though it is a high double digit growth play and management pushes strong growth rhetoric whilst the reality is it is NOT growing at all. Nobody seems to want to even talk about this let alone accept it.

I don’t get why everyone accepts that Skyworks can see far into the future in terms of future revenue penetration and buys into the rolling snowball of Skyworks adoption due to increasing customer complexity can explain double digits growth last year and projected growth in H2 but somehow doesn’t explain why we are in zero growth now and why this wasn’t even forecasted.

Ok leaving that aside, why am I not positive about Skyworks?

  1. As posters on this board that represent customers have testified, there is little if anything to differentiate between the analog players.

  2. Substitution can happen instantly - forget about this design win with years of future visibility. Skyworks lost the S7 in the US in one stroke because they don’t supply Qualcomm.

  3. Suppliers like Skyworks are the trailer to the chip customer truck. Neither Apple nor Samsung are going to be choosing Qualcomm vs Samsung on the basis that they use Skyworks however indirectly they are choosing or not choosing Skyworks on the basis of Qualcomm or Samsung. So we have allied camps of supply chains. If Qualcomm start to win over Samsung - Skyworks could be out of the game. I don’t even know what would happen if Intel or Nvidia or anyone else started to get more traction. I don’t like that kind of uncertainty.

  4. The new areas of growth are just not growing fast enough for them - they talk IOT but I’m not seeing that in revenue growth.

  5. I’m not sure Skyworks have as broad a range of offerings as their competitors.

  6. There has been a lot of consolidation amongst the competitors leaving Skyworks smaller and less dominant, I’m not sure how that would handicap them.

  7. I always worry that end customers will squeeze margin out of the chip supplier value chain. They always have and always will. The argument that what they do is so complicated and specialized that it protects them cannot be supported if 1 and 2 and 3 are the case.

Cheers
Ant

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I have to agree with Ant and LNS. To me, SWKS falls into the “too hard” category. It’s currently shrinking, and even if it’s inevitable sales will grow again someday, the margins have to shrink at some point, one would think. Is it value or a value trap? I really don’t know, but it doesn’t scream bargain to me, and there are a lot more questions than I’m comfortable with. And none of the questions are what I would call “simple.”

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4) The new areas of growth are just not growing fast enough for them - they talk IOT but I’m not seeing that in revenue growth.

For me, this is really the issue/question. IoT is a new industry, and while it’s almost certainly going to be huge, it is also very broad and diverse. That makes it hard to pinpoint who is going to have wins and who isn’t. And, it’s looking like it’ll take years.

The Street believes that being too soon is almost as bad as being too late. They’d rather be a bit late on a surer thing than early on a risky thing. So, you won’t see money pouring into SWKS until they start showing IoT success on the balance sheet.

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If you want an IOT play just go with ARM. Skyworks is going to be down the food chain as it is in other areas and will just get towed along. ARM might actually end up owning the entire food chain. Skyworks is always going to be in the same truck and trail position in any sector by virtue of what it does. It will face the same upside and risks in IOT but just benefit from more volume demand.
Ant

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Ant, thank you for your view. I think we’ll have to agree to disagree on this stock. Time will tell. :slight_smile:

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No worries. I hope I’m wrong as I’m a holder but I am certainly not adding to my holding and will look for a decent exit point as/when I can.
Ant

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I think you can have some answers for your questions by simply looking and deducing the share Apple has on their total revenue. You can then gauge how much they are tied together.

Diversifying away from Apple has been done through key acquisitions by for example AVGO over the past couple of years. Avago now Broadcom has done it very successfully.

Skyworks tried but failed to acquire PMC Sierra last year. It would be interesting to see what they are doing about mitigating this dependence on Apple. I don’t think to be overly tied to Apple is good for Skyworks.

There is also an element of cyclicality in this business that should be accounted for. I guess the smartphone upgrades have been driving this.

The talk of IoT is somewhat vague to me. The market is very large and that is the problem because there are many catering to the ‘IoT’. Where does their advantage lie? Can they drive up this business? any signs we can see?

tj

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The talk of IoT is somewhat vague to me. The market is very large and that is the problem because there are many catering to the ‘IoT’. Where does their advantage lie? Can they drive up this business? any signs we can see?

The money is not in the things. The money is in the data.

Cheers
Qazulight. (Will decompose BDAT one day.)

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SWKS has been one of my highest conviction stocks this year and it’s
my second largest holding. This was largely based on the confidence
shown by management late last year when they were talking about $8/yr
earnings within about two years. Based on design wins, they could
project things would really pick up in the second half of this year.
I was convinced by their confidence and optimism and growth record.

But then Apple scaled back a bit on volume and we seem to be
hitting a saturation point for smartphone sales. I’ll be watching
the guidance closely to see what they say about next quarter
(and any longer-term hints they might give in the earnings call).
Will the margins continue to improve? Will the volume/growth be
reestablished?

If they can get to $7 or $8 earnings in the next few years then the
current price is very attractive. If they hit the wall at $5-6,
then it’s not such a slam dunk. Obviously the market is a bit
cautious about them right now, as the price keeps getting yanked
back to the 50’s. I’d love to pick up some more, but I already
have too much. Hopefully we’ll get some good news looking forward.

MC

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All,
Hasn’t management predicted that this quarter would be light, and that the following quarters they were expecting meaningful growth? I will be HIGHLY interested in the conference call and forward statements this quarter. They have been spot on with their forecasting as far as I could remember.

Best,

bulwnkl

Long SWKS

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