SWKS moat full of alligators?

Investment Analysis Clubs Saul’s Investing Discussions
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Friends,

Thanks to Saul’s link to the Skyworks presentation, Monkey, too, now confirms that he feels SWKS is a tremendous investing opportunity and has wager lots of bananas accordingly. There is a lot of conviction expressed by the CEO with lots of fancy charts and figures that support his enthusiastic claims.

Here’s the link from up-board which all investors in the company oughtta watch:

http://investors.skyworksinc.com//eventdetail.cfm?eventid=16…

But even though lots of things are spelled out, some abstractions remain, which Monkey hopes a Big Brain could help explain.

1)Skyworks doesn’t sell components, it sells complex design solutions with those components, right? Often working on the design years ahead of the product release. So Skyworks is not exactly in the chip/circuit/conductor/gadgets business, which is good, because those get commodified.

  1. Margins are going up. Therefore competition is not making inroads.

  2. But why? If this is such a good business, with such a huge market opportunity, why is Skyworks the only company that knows how to put components together into a single box? Are there not lots of engineers running around with this kind of know-how?

  3. The rules of capitalism make sure that competition arises. If it’s not about the pieces of technology, but about the design infrastructure of those pieces, what’s preventing another company from studying how skyworks puts things together and then setting up their own shop, and little by little charging less and stealing business?

  4. These are all simplifications of what’s no doubt a more complex problem, but the basic question is the same––why are there alligators in Skyworks’s moat? Is it a question of first-mover advantage? Of scale? Of some kind of black magic?

Thanks in Advance for your Insights,

Monkey
Long SWKS

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Hi Monkey,

Let me see if I can shed some light here. Skyworks has plenty of competitors and some are much larger companies in terms of resources. Analog Devices, RF Micro, Linear Tech, Maxim, Qualcomm, Avago, and Triquent all compete in certain areas and have overlapping products. Skyworks does indeed sell components in addition to multi-chip modules and other value-added integrated solutions. It seems to me that they have the preferred solution in LTE for the antenna to transceiver interface in wireless devices and that may be a big alligator that will be tough to get around, although I’m certain others are trying.

Another factor here is probably a customer stickiness issue. They claim to be privy to some fairly major customers’ product roadmaps. These customers don’t like to let much be known about these roadmaps for competitive reasons and this may give the incumbent vendor a big leg up over time since they can have new designs ready when they are needed.

I’ve heard that they treat their employees quite well, which probably minimizes engineer churn. That lack of churn is another competitive advantage in this industry.

This is all fine and dandy until it isn’t. Be assured there is competition out there and Skyworks just sits in a nice spot right now. This is always subject to change and needs to be watched closely.

Regards,
Stan

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Hi Monkey, As to your question about what is keeping SWKS from being commoditized, here’s an excerpt from my Skyworks Mid-Quarter Review a couple of weeks ago which was a MF Post of the Day (Post #14975)

Don’t chip manufacturers become commoditized?
Yes, that usually happens because competitors make cheaper competing products, causing the company’s margins to fall and fall. Skyworks has taken a different route, however and have become a “Master of Complexity”. They plan with the manufacturer from six months to two years ahead of time what the manufacturer wants and needs in a future model, and then Skyworks combines multiple functions in the same chip. They make themselves indispensible to the manufacturer. Their gross margins have been rising consistently, not falling. They had set a medium range goal of 50% gross margins but have already surpassed that so they have raised their goals to 55%. Their operating margins were about 35% last time I looked. Does that sound as if they are being commoditized?

How does this benefit their customers?
In the past, as I understand it, the customer (phone manufacturer XYZ) had to buy, let’s say five commodity chips, for five functions, from different manufacturers, and then XYZ’s engineers had to figure out how to make them work together in the best way to do what XYZ needed. Now, XYZ works in advance with SWKS (who already knows a lot about what XYZ wants from working with XYZ on earlier models), plans ahead for the next model, and then the complex chip arrives. It combines all five functions in advance so they work together, it’s smaller (important), uses less power (very important), and it’s cheaper than buying five separate chips (I think). All in all, this is a very important relationship for XYZ.

Can’t they just be designed out of the next model in a few weeks if someone else comes along with a cheaper chip?
You’ve got to be kidding! Did you read the paragraph above?

But how can they keep 50% gross margins and rising? Why don’t the phone manufacturers pressure them to cut margins?
Because the phone manufacturer is getting a tremendous bargain and benefit. They don’t have to have engineers trying to jerry-rig the integration of five different functions at the last minute. They get them all on one chip, and it’s smaller, less energy consuming and cheaper. If someone came along and said “We’ll sell you a chip that can do function three for 15 cents cheaper,” they’d laugh at them. Company XYZ simply doesn’t care how much money SWKS is making because SWKS is saving XYZ a lot of time, energy, money and headaches. (That’s how I see it anyway).

I hope that this helps. You have to add though, the following: If you are a big phone manufacturer (and remember, ALL the phone manufacturers buy from SWKS), and you’ve been working with SWKS on previous models and you know their solutions work, and you are about to put out a new model with the hope of selling millions, and someone comes to you and says “Hey, I can give you a solution almost as good (or slightly better, even), for 20 cents less”, do you risk your new phone model to save 20 cents on a chip? I don’t think so.

Best,

Saul

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Hi Monkey, As to your question about what is keeping SWKS from being commoditized, here’s an excerpt from my Skyworks Mid-Quarter Review a couple of weeks ago which was a MF Post of the Day (Post #14975)

One correction it is (Post #13975)

Other than that, right on!

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OK, here is my question, and I know this will reveal a certain naiveté – but is it a good thing or a bad thing to have alligators in the moat? The answer is obviously central to an understanding of this thread!

I can see arguments both ways.

On the one hand (OTOH), alligators in the moat will help keep intruders out – at least those intruders who may not have qualified for Phi Beta Kappa during their college years. Although I can picture beer being a factor as well:

Intruder #1: Let’s jump in and swim across the moat!
Intruder #2: Isn’t that an alligator over there?
Intruder #1: Yes maybe it is . . . . Say, pass me another longneck Stroh’s, kimosabe.
Intruder #2 [passing a beer]: Here’s to swimmin’ with bow-legged women . . . . Down the hatch!!
[A few minutes pass, a few beers are fire-hosed down . . .]
Intruder #1: Say, where are we?
Intruder #2: I’m not sure – that looks like a moat, though.
Intruder #1: Cool. Let’s swim across!
Intruder #2: You are on, Padawan!
SPLASH!! SPLASH!!
CHOMP!! CHOMP!!

So net/net this illustrates a benefit of having alligators in the moat (viewed, of course, from the perspective of the moat owner).

But, on the other hand (OTOH), most of the time there are no intruders waiting to ransack the castle . . . but the alligators are still there. This is not necessarily a good thing, right?

Let me explain why.

Maybe you are coming home late one night from a party and you stumble as you cross the drawbridge.

SPLASH!! CHOMP!!

Maybe you are playing fetch the stick with Fido and by mistake you toss the stick into the moat.

SPLASH!! CHOMP!!

Or maybe little Suzie is playing on the castle wall and her doll falls into the moat, and she decides to go after it.

SPLASH . . . well, there is no need to detail the grim conclusion.

So I am in a real quandary here. Do we want there to be alligators in SWKS’ moat, or are we worried that there might be alligators there?

I have a second point as well. Why in heavens name have a moat at all?

Sure, back in the eleventh century a moat might have been an effective deterrent, but . . . have you seen what those Sherpas can do in the high mountains? They lay portable ladders across the most daunting crevasses in a matter of seconds.

No, if the ransackers have a team of Sherpas along, your moat will hardly even slow them down.

And, anyway, there are much more effective deterrents, using modern technology.

Specifically, I recommend a combination of (i) two noisy terriers and (ii) a high-volume sound-activated music system set up to play Barry Manilow songs as soon as it is tripped. The miscreants will try to enter, the terriers will bark like crazy, triggering the sound-sensitive music switch, and the areas will be flooded with Barry Manilow at his finest.

Research is pretty clear that home invaders cannot stand Barry Manilow - - they will hit the road, and you will be safe. And no nasty little alligator accidents along the way.

Well, I have been laying low after the recent series of posts asking people to stick with board-appropriate material, but I am glad to finally have something pertinent to contribute.

Rich

Innocuous Irv

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They can be commoditized if all the smart phones are going to be commoditized. At this point the XYZ vendor would not care too much about the highest speed or the strongest signal and will go with the cheapest possible solution simply because it has no choice.

Saul, how sure are you that this is not around the corner for us?

I guess the question should be:
How important will it be for people to move from LTE to 5G?
What 5G can do that 4G cannot? (Super High definition videos like the presentation details)?

I guess I don’t belong to the generation that watches Videos on a smart phone may be the young generation does and will pay for 5G.

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What 5G can do that 4G cannot? (Super High definition videos like the presentation details)?

I haven’t seen all the specs on 5G yet, but I have been reviewing 4 G LTE. 4G LTE has capability of hitting 15 bits per hertz of bandwidth in bandwidth efficiency. This is multiple time more bit density than 3 G.

If 5G offers these capabilities, not to the customer, but to the provider, they will get pushed out.

Cheers
Qazulight

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If 5G offers these capabilities, not to the customer, but to the provider, they will get pushed out.

5G will be a challenge to the provider as the will have to upgrade the cellular infrastructure to support higher bandwidth.

Correct me if I am wrong (and I don’t think I am wrong).

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“I guess I don’t belong to the generation that watches Videos on a smart phone may be the young generation does and will pay for 5G.”

Well, as an 18 year old, I think I can speak maybe a bit into this. A huge part of what I do on my phone is watch video. Whether it be Youtube, Netflix, or Twitch.tv (Video game streaming service recently bought by google for $1 billion) I watch a crap ton. And let me tell you, buffering makes me want to slam my phone against a wall (A bit overdramatic but you get the idea.) I don’t know what will make 5g better than 4g LTE but if it’s anything like the gap between 4G LTE and 3G I can guarantee you the younger generation will snatch that up very quickly.

Furthermore, the video game business is expanding dramatically. A lot of older people (at least my parents don’t) generally don’t know this, but video game streaming is growing larger and larger (mostly through Twitch.tv). Plus almost every kid watches youtube or netflix daily. So there is definitely a huge demand for video, and all of it can be accessed via mobile. I guess it relates a bit to the 4k TV idea. Is 4k really necessary? Probably not. But once you start watching everything in 4k when you go back to default resolutions everything just looks awful.

I don’t know, just some thoughts. If you have any questions for an 18 year old consumer, feel free to ask. I watch a few hours of video a day probably, never watch TV unless I’m watching the Patriots.

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I don’t know, just some thoughts. If you have any questions for an 18 year old consumer, feel free to ask. I watch a few hours of video a day probably, never watch TV unless I’m watching the Patriots.

Thanks a lot for your answer! It is really helpful to me.
If you have any question for an old fart go ahead!
By the way old farts sometimes do smell.

Without being asked, I think you’ll be really successful since you are starting to invest really young. This board is good place to be in.
If you have any other related question let me know!

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If 5G offers these capabilities, not to the customer, but to the provider, they will get pushed out.

5G will be a challenge to the provider as the will have to upgrade the cellular infrastructure to support higher bandwidth.

Correct me if I am wrong (and I don’t think I am wrong).

Actually the challenge was LTE. Getting the fiber in, and removing the circuit switched backbone. 5G will probably, (Note the weasel words) improve the bandwidth efficiency.

Equipment upgrades once the fiber and towers are built are not that difficult. The difficulty is wrenching bandwidth out of other people’s hands.

Bandwidth is like real estate, no more is being made.

Cheers
Qazulight

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Well, as an 18 year old…I watch a crap ton

Thanks for the younger perspective! And BTW, would you happen to be my son? JK, but you do sound like him, he uses “crap ton” all the time, I had never heard that anywhere else.

I have 3 boys aged 16-21 and I have to concur they are like you, watch a lot of video on their phones (a crap ton, even), the older two are in college for film and television production so they blame it on that.

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5G will be a challenge to the provider as the will have to upgrade the cellular infrastructure to support higher bandwidth.

Sounds like a good problem for INFN to solve, yet another fantastic Saul stock…and by the time the outcome of the lawsuits w/ Cisco, etc are known, possibly an investment in ANET would also be within the realm of Saul Stocks.

sjo

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“Thanks for the younger perspective! And BTW, would you happen to be my son? JK, but you do sound like him, he uses “crap ton” all the time, I had never heard that anywhere else.”

I can confirm that saying is a thing. I had to admit, as I was writing that I was questioning myself but I just was like whatever I’ll just keep it in.

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Well, as an 18 year old, I think I can speak maybe a bit into this. A huge part of what I do on my phone is watch video.

Thanks Brennan for your report from the trenches. That kind of report from real life is what makes these boards so useful!

Saul

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“Thanks for the younger perspective! And BTW, would you happen to be my son? JK, but you do sound like him, he uses “crap ton” all the time, I had never heard that anywhere else.”

Hi Brennan,
Since you’re just starting out on the boards I’ll take the liberty of explaining something useful to you. Most quotes are copied in italics on the boards. The way you do that is to put these symbols before and after the words you want italicized: and . If you want something to be in italics you replace the x with an i for italics. If you want something to be in bold, you replace the x with a b for bold.

Best

Saul

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LOL. I can back up Brennan et. al…I have two teenage boys, ages 16 and 13. They watch Twitch as a well, and they also use the phrase “crap ton”. :slight_smile: If you’re not a recent parent of teenager, you have no inkling of how popular gaming is and the potential dollar upside of the gaming industry. Also, I’m a heavy iPhone user myself and I’m only beginning to glimpse the possibilities of what’s possible as data demand and capacity increases. Skyworks ain’t goin’ nowhere!

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Since you’re just starting out on the boards I’ll take the liberty of explaining something useful to you. Most quotes are copied in italics on the boards. The way you do that is to put these symbols before and after the words you want italicized: and .

Thanks Saul,
Not going to lie, googled it right after I posted that response haha.

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I am not at all sure that, for an 18 year-old, this board ‘is a good place to be’. Possibly it is a good place to be along with other good places to be. One good place to be would be running an imaginary portfolio for a couple of years as an (albeit too short) test of his uncertain abilities which clearly have an inclination towards risk.

In addition, he should try reading instead of watching videos. Read widely. Start with the great American classics. For at least two hours a day, read about investing, but only by authors who are rich and those who avoid technology to understand why they do so. Take a course in accountancy. Do not even think about investing until you can define at least 30 business metrics. If you can, get a job and investigate every detail of the business, how it makes money, how it could make more.

Work hard, avoid social media and you have got a real chance in life. And remember that you make serious money from running a business, not investing in them.

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Between this and the ULTA board you’re sounding so crotchety lately. I’m thrilled that an 18 year old is here. An 18 year old can take some risk because they have tons of glorious time to recover if they have setbacks.

There is no one and only way to invest successfully.

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