SWKS: Great Way to Play IOT Trend

From Foolish contributor Brian Feroldi:

Skyworks Solutions’ stock has been on fire over the last few years, propelled mainly by the explosive growth of the smartphone industry. Skyworks supplies chips to nearly every major smartphone provider in the world, so demand for the company’s products has grown right along with the market. Over the last five years, the company’s top line has grown at an impressive 20% annualized, and earnings have grown even faster.

But Skyworks’ management isn’t resting on its laurels; it’s been investing aggressively to become a leader in the IoT space. Every quarter, the company announces design wins in new growth markets like drones, smart TVs, and cameras, putting the company at the forefront of the trend.

One reason I’m confident Skyworks is a great way to play the IoT trend is because the company has a history of growing sales without needing to discount its products. Believe it or not, last quarter, Skyworks was actually able to expand its non-GAAP gross margin by 410 basis points, coming in at 50.8%. That achievement should be applauded, especially when you consider that chip suppliers face huge pressure from customers to lower prices in order to maintain their market share.

Read the entire article at http://www.fool.com/investing/2016/07/16/3-stocks-to-invest-…

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Not trying to play devil’s advocate, but don’t (extremely) high margins come with the inherent risk that they could be pushed back down by customer demand, competition, etc? I know SWKS feels they are able to do things the competition can’t, but this seems implausible to me, esp since they’ve already been replaced in some phones. Why not all phones? And other things? If companies can beat them on price, I don’t see why they wouldn’t get pressure from their customers to reduce theirs, esp when they have such large margins.

And of course if margins decreased, EPS would go down. That’s what I always worry about with GILD too.


Ultimately, higher margins occur when you create value for your customer and yourself at the same time. If SWKS can add greater functionality to their parts, then it’s worth it. It doesn’t have to be a zero sum game. New competition would be a problem if it becomes the race to the bottom so that certainly requires a steady watch.