SWKS - My Mid-Quarter Review

Investment Analysis Clubs Saul’s Investing Discussions
#16

To take an extreme example, which vehicle would give you the better total return over the next 30 years, SWKS or KXI (a global consumer-staples ETF)? It might be SWKS but my money would be on KXI.

I think one needs to distinguish between the Competitive Advantage Gap vs. the Competitive Advantage Period…as wonderfully described in The Gorilla Game.

It’s much easier to describe with pictures and graphs. Imagine a graph with free cash flow on the vertical axis, and time on the horizontal axis. What an investor wants is the maximum area under the curve. This is going to be a combination of CAG and CAP. A business with an unusually high CAG (e.g. Skyworks) can do quite well, even if the length along the horizontal axis is relatively short (this assumes, of course, that rational capital allocation continues to the end…rather than the business doing stupid stuff once is original strengths recede). On the other hand, a business with only modest CAG can also do well, as long as this persists for a very long time (this is the stuff Buffett likes, such as the railroad). It’s not an either-or situation.

I think a great illustration of this is Microsoft, with both Windows and Office. Those had outrageously high CAG. But they’re slowly fading, and will likely continue on that path. Yet they were still enormously worthwhile as investments.

It’s an interesting paradox to me, that on the one hand, many businesses (especially technology) are felt to be more risky and uncertain as people (e.g. Buffett) feel they just can’t see far distant into the future with those businesses. On the other hand, given that all future cash flows have to be discounted back to the present, it is precisely the nearest cash flows that are most valuable.

I think the worst situation is buying a technology business that isn’t generating much free cash flow now, with the hope that it will some time in the fairly-distant future. But when you have a business like Skyworks that is generating terrific cash flows (and return on invested capital) now, and you’re only paying 10X current earnings, that is a completely different matter.

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#17

on suppliers of analog chips

http://pcsemicon.blogspot.com/2012/02/top-10-suppliers-of-an…

there is no long term sustainable competitive advantage for any of them. And not for SWKS . If you think long term means at least a decade. But the stock market does not think a decade ahead.

Linear Technology (LLTC) seemed to have a strong competitive edge in 2000 when it hit $55 or so. Despite decent business it is lower now 16 years later. But the P/E of SWKS is not sky high and I suspect it’s advantage will last a few years.

If I was going to buy the stock of a company and go away for 8 or 10 years I would think" who knows about the future but innovation is underway"companies like Tesla or Arcam , who probably will either be a lot bigger or broke by then. SWKS is a player in IOT, the other companies mentioned are at the heart of the innovation

Perhaps a tech stock simply cannot be evaluated in the same way as Buffett would evaluate a company
Agree. The Coke brand name added value 20 years ago adds value today and will still add value 20 years in the future unless they have their own version of Exon Valdez.

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#18

Actually very high grade investment casting is done by only a few companies

http://www.ruger-firearms.com/casting/index.html
http://dailycaller.com/2014/10/06/casting-call-rugers-invest…
http://www.precast.com

Ruger owns one of the few capable of casting things like firearms receivers, where any tiny weakness or crack leads can lead to catastrophic failure. Ruger use of this process leads to firearms as strong as the competitors forged and machined parts but cheaper to make.

Up and coming in this world of these high quality metal parts is metal 3D printing done by laser or electron beam. For most uses these 3DP methodologies do not overlap, and have almost nothing to do with 3DP done in plastic. So in the not very distant future there will be precision casting, forging and CNC machining ,and 3D printing (additive manufacturing) each with their own niche for demanding products like aerospace, medical implants, fine firearms etc.

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#19

Linear Technology (LLTC) seemed to have a strong competitive edge in 2000 when it hit $55 or so. Despite decent business it is lower now 16 years later. But the P/E of SWKS is not sky high and I suspect it’s advantage will last a few years.

They mostly make discrete chips don’t they (I may be wrong on this, I don’t follow them). If so, then this is completely an apples to oranges comparison.

on suppliers of analog chips

http://pcsemicon.blogspot.com/2012/02/top-10-suppliers-of-an……

there is no long term sustainable competitive advantage for any of them. And not for SWKS .

By grouping all of them simply as “suppliers” of “analog chips”, I think you’re missing what’s going on with businesses like Skyworks and QRVO. A decade ago, they were mostly selling discrete units, which various OEMs would then put into their products. All the value-add was with the OEMs. That has completely changed now, due to the incredible demands the modern smartphone is placing on both limited radio spectrum, as well as the need to do exponentially more without using more precious battery. There is a world of difference between the two.

But my investing in technology does not go back many decades. So maybe someone can educate me. What are some technology businesses that were doing such demanding integration of dozens of parts that only a few businesses had the capability of doing such integration?

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#20

Up and coming in this world of these high quality metal parts is metal 3D printing done by laser or electron beam. For most uses these 3DP methodologies do not overlap, and have almost nothing to do with 3DP done in plastic. So in the not very distant future there will be precision casting, forging and CNC machining ,and 3D printing (additive manufacturing) each with their own niche for demanding products like aerospace, medical implants, fine firearms etc.

So do you think that Buffett just wasted $32 billion on a business whose prior competitive advantage will be displaced by new technologies??

Actually very high grade investment casting is done by only a few companies

Actually there are only a few companies who can do the kind of RF/PA integration that Skyworks is doing. I guess the question is what is inherently different about the two? Simply the word “technology”??

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#21

there is no long term sustainable competitive advantage for any of them. And not for SWKS . If you think long term means at least a decade. But the stock market does not think a decade ahead.

Linear Technology (LLTC) seemed to have a strong competitive edge in 2000 when it hit $55 or so. Despite decent business it is lower now 16 years later. But the P/E of SWKS is not sky high and I suspect it’s advantage will last a few years.

I don’t follow LLTC, but a quick look at their financial demonstrates that they do indeed have a long term competitive advantage. For how else could they maintain such impressive ROE, ROA, and net margins year after year after year? Where are all the capitalist-loving competitors entering the business, dragging margins and returns down toward the cost of capital??

Even in the matter of growth, they’ve grown free cash flow per share at about 5% per year over the past decade. The problem isn’t with LLTC as a business, nor with the sustainability of their competitive advantage, but rather with the absurd prices people were paying for a fractional share of the business in 2000. The best business in the world can be a failure if you pay a stupid price. On the flip side, given that Skyworks has a current earnings yield of 10%, if it grows 5% CAGR for the next decade (mirroring LLTC), it will be a phenomenal investment. And odds are enormously high that the growth will be higher, given that they’re in a much higher growth industry than LLTC was a decade ago…as they say “mobile is eating the world”, and Skyworks (and the couple other businesses that can do what they do) are empowering that.

So, if anything, the persistence of LLTC’s moat in it’s particular analog business strengthens the case for the likes of SWKS and QRVO.

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#22

" I think you’re missing what’s going on with businesses like Skyworks and QRVO. "
not so

I presented the list of analog chip makers because I heard the same argument of "few know how to do this analog " 15 years ago.

Technology leaders do not stay that way for long… Sooner probably rather than later a shift in tech comes and they lose their lead. For instance disk drive makers couldn’t even survive a seemingly minor change in disk size.

Many of those analog chip makers from 20 years ago did survive. Some even prospered but their stock price often did not.

There is no long term sustainable competitive advantage for any of them. And not for SWKS . At least not enough to keep their stock price buoyant for decades. I will be happy with 3 or 4 more good years because this is beyond the time range of most institutions.

Has anything changed about Skyworks in the last few months? Well probably not much for the company but something has definitely changed about the stock SWKS. And not for the good. Not being Buffett, here we get to buy only stocks not whole companies.

BTW long SWKS

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#23

Has anything changed about Skyworks in the last few months? Well probably not much for the company but something has definitely changed about the stock SWKS. And not for the good.

I guess that’s all relative.

I bought my first shares at $78, and added progressively more as it tanked, all the way down past $60. So it has definitely been “good change” in the stock for me.

I presented the list of analog chip makers because I heard the same argument of "few know how to do this analog " 15 years ago.

Technology leaders do not stay that way for long… Sooner probably rather than later a shift in tech comes and they lose their lead.

Again, I don’t follow Linear Technologies. But from what I can tell, they still are one of the few who is doing the kind of work that they were back in 2000. So no one knocked them off their hilltop. It’s just that they’re market has been a slow grower. Sure, some day mobile computing and IotT will slow. But that day is a long way off.

For instance disk drive makers couldn’t even survive a seemingly minor change in disk size.

To me this seems to show that you still aren’t getting it. Disk drives are fundamentally a “discrete” item. Anyone with a bit of insight could have and should have known that soon there would be a better mousetrap. But that is not primarily what the likes of Skyworks and QVRO are about. Maybe that’s where they started. But they made the brilliant (or maybe lucky) transition to being the provider of integrated solutions. It is a certainty that the specific technology of the dozens of discrete they’re using will change many times over the coming decades. But someone is still going to have to do the incredibly difficult integration. And unlike simply coming up with a different disk drive, that’s a far, far bigger chasm to jump across…and it’s going to get wider and wider every year. (Which is why I do not think QCOM will catch them. But that will be interesting to watch. I’m guessing it will end up like the Amazon phone. And if it does that should be pretty good proof of how high the barriers to entry in this field have become. Stay tuned.)

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#24

My first ‘triple’ in investing was with an analog device manufacturer, Dallas Semiconductor. It was sold to a competitor in 2001. From Wikipedia:

Dallas Semiconductor, acquired by Maxim Integrated Products in 2001, designed and manufactured analog, digital, and mixed-signal semiconductors (integrated circuits, or ICs). Its specialties included communications products (including T/E and Ethernet products), microcontrollers, battery management, thermal sensing and thermal management, non-volatile RAM, microprocessor supervisors, delay lines, silicon oscillators, digital potentiometers, real-time clocks, temperature-compensated crystal oscillators (TCXOs), iButton, and 1-Wire products.

So, yes, investments in such niche companies can be very profitable. I think Skyworks is much better situated than Dallas Semi was back in the day because of the integration of multiple functions into single, bespoken ICs, designed in collaboration with the phone manufacturers. That is a very cozy position that bodes very, very well for the future.

Tiptree, Fool One guide, long SWKS

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#25

I totally agree with you that sustainable advantage is difficult to sustain in this business. It sounds that many on this thread have a different view about SKWS. But I don’t think it is any different. I guess when you are in the business (you?) it tends to color your view.

I know Avago very well. It does compete with SWKS on some levels but they are much more with their recent acquisitions in storage and datacenter switches. Btw, Avago is no longer called Avago but Broadcom.
Avago has a stable component in the storage business and growth in the datacenters.

long AVGO and SWKS.

tj

#26

I bought my first shares at $78, and added progressively more as it tanked, all the way down past $60. So it has definitely been “good change” in the stock for me.

OK, losing money is good news to you. Not to me.

someone is still going to have to do the incredibly difficult integration

Agreed but you have no for sure knowledge who it will be. Only belief and faith. Maybe good enough for to hold SWKS as long as it seems to be true. But not being an insider I doubt if I will be the first to know they are slipping. So I am not a true believer.

there is no more dominate chip maker than Intel. The lock in, patents and billion plus cost of fabs does give it sustained advantage - in fact it is a near monopoly Yet look at this chart
http://finance.yahoo.com/echarts?s=INTC+Interactive#{“range”:“max”,“allowChartStacking”:true}

when you buy is important

re metals

did you read?

“each with their own niche”

Only time will tell if precision casting will grow in importance. Buffet is looking for sustained competitive position, the market for metal parts is enormous. Higher precision castings mean less machining or polishing of resulting parts so it can capture market share.Especially by replacing expensive machining. But by it’s nature there are many things casting can not do.
.
Precision casting will never be used for manhole covers,rough and cheap is good enough . Many other casting technologies are also good enough - ICE engine blocks for instance. So to grow, precision casting will need new markets. I mentioned Ruger because 20 years from now I expect precision casting to be the dominant method of making most firearm parts.

https://www.shapeways.com/blog/archives/1933-comparing-apple…

Actually I think that both precision casting and 3DP will over time capture some market share from subtractive manufacturing. Even a couple of percentage points would be very big bucks.

Things change much slower in metals than in chips. Over a long period I would rather own Buffett’s casting company than Skyworks .And so would Buffet . If really wanted to he could probably have bought Skyworks instead.

my last post on this subject

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#27

OK, losing money is good news to you. Not to me.

I see the chance that the $78 dollar shares lose money as approaching zero. And others are already in the black. We’ll see. My point, anyway, is that if it hadn’t tanked from $112, I wouldn’t be an owner.

That being said, I hope the shares stay low for a long time, as I anticipate that Skyworks will be allocating a fair amount of cash every year to buybacks, and that means more shares retired.

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#28

Just my two cents:

There was a long period of time where railroads
were considered an awful investment due to their
capital-intensive nature without providing a
durable competitive advantage. Years go by and
oil gets expensive, US becomes an oil producer,
highways get more crowded, and now the railroads
are considered to have a very wide moat.

The smartphone industry is essentially 10 years old,
and IoT is even more infantile, so at this point it is
difficult to determine if Skyworks has a wide moat, or
not. One of the key difficulties being that we
ourselves don’t have a firm grasp on how IoT will
change the world over the next 10 years plus .

To make this point, if we took a poll in 2004 after
the tech bubble burst, and asked a group of investors
whether a search engine company had a wide moat,
most would have likely said no. Twelve years later
and Google probably has one of the widest moats of
all publicly traded companies.

If one believes that Skyworks is a one-trick
pony, with a management team that is happy to rest
in its current niche without developing further into
IoT, then yes, I would agree that the company is at
risk from competitors, even if they have a 24 month
head start on everyone else.

However, if one believes that the IoT is going to
really take off and and you believe that
Skyworks will seize its place within the industry,
then it would be completely foolish to throw Skyworks in
the “lack of durable competitive advantage” bucket with
companies manufacturing chips for laptops and it
would be foolish to assume that it is a winner take all
market.

I personally envision a world where IoT improves nearly
everything.Streetlamps, cars, planes, ships, traffic lights,
smoke detectors, home appliances, firearms, vending machines,
you name it.

The companies that secure contracts to provide these services
will have an extremely sticky business (people switch laptops
every couple of years for the latest greatest thing, but can governments replace traffic lights for their entire
municipalities every two years?)

With this all said, the key question in my mind is
not how many IPhones will ship next quarter, but rather,
to what extent Skyworks management understands this incredible opportunity that is sitting in front of them for the taking, and
to what extent will their sales and engineering teams be able
to being these new applications to market. If they are successful
in IoT, they could easily become a $100 billion dollar company
in my opinion.

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#29

good post Steve
the key question in my mind is not how many IPhones will ship next quarter, but rather,to what extent Skyworks management understands this incredible opportunity that is sitting in front of them for the taking, and to what extent will their sales and engineering teams be able
to being these new applications to market.
Especially since analysts concentrate on iPhone sales. Why? it’s easier and makes a nice story to unsophisticated players.

"there are the known unknowns and there are unknown unknowns " - to quote Rumsfeld

IOT and Skyworks as a company have both. With Skyworks you have to add in that you can only buy the stock (a surrogate at best) not the company. Stock prices are dictated more by the general market than by individual earnings.

If IOT grows fast enough and gets big enough it will attract players like dog poop attracted flies. However a company does not have to control any industry to do well. Cisco now has lots of people making similar systems and still does fine.
If Skyworks management has proper vision, and talent put to use, I see no reason why they can’t be a leader for a goodly number of years. Which is why I own SWKS. Especially because it does not have a lofty P/E thus suggesting Mr Market is not excited about the prospects of the company.

If I can’t see how IOT would help some things (firearms, my refrigerator) it means either I have lack of vision or indeed it will be a flop. I picked those 2 because I have lots of experience with both. I also have several decades of experience with cars and can see that IOT will be big in cars and many other things

The internet has grown from my 300 baud days in ways I never expected, and is far bigger the I would have guessed at that time.

Google is an exception. I am still not sure how Google pulled it off. My own theory is that they figured out that one overworked genius programer is better than 5 mediocre ones. They could pay that one twice as much and still come out ahead. . I would love to hear other input because some other company will pull a google and I would like to buy some stock early on.

It gets ever harder to separate wishful thinking, science fiction, and rational projections. Whatever , one thing is clear to me, the technology driven future rushes toward us at an ever faster rate, more like a falling object than a thrown one.

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#30

Thanks Steve, for that very open minded and visionary response.

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#31

there is no long term sustainable competitive advantage for any of them. And not for SWKS . If you think long term means at least a decade.

Hi Mauser, I’m too old to worry about “at least a decade”. I might not live that long! I’m very happy with 3-5 years of clear advantage, and I think SWKS has that.

Saul

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#32

Saul can’t disagree with any of that post. Including the "too old " bit for me too.

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#33

Thanks, Saul, for representing all of us old fogies who have a slightly shorter time horizon.

I’ve done the math and now appreciate each day as both a blessing and a bonus.

Jim

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#34

Saul, thank you for that reminder! I don’t have the same shorter time horizon, but it did occur to me that the “30 year” timeframe is effectively the “buy and hold forever” mentality. But I don’t invest that way. While I have an investment horizon which could include holding a company for 30+ years, I am primarily focused on what will happen in the upcoming 5 years.

#35

Hi Mauser, I’m too old to worry about “at least a decade”. I might not live that long! I’m very happy with 3-5 years of clear advantage, and I think SWKS has that.

Funny thing is you have all these Wall Street guys in their 30’s and 40’s, but they have an investment horizon measured in months.

Which is very important when you see a stock like Skyworks tanking and you’re worried that the “smart money” knows something you don’t. But unless you’re a very short-term trader, they’re playing a completely different game than you. Thus the absurdly cheap price on SWKS, because it’s going to be rough for 3-6 months. Love it.

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