SWKS - My Mid-Quarter Review

[mauser96]

" 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

[commoncents33]

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.)

[TMFTiptree]

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

[thejusticier]

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

[mauser96]

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

[commoncents33]

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.

[StevesStox]

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.

[mauser96]

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.

[Earthshine123]

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

[SaulR80683]

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

[mauser96]

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

[drillerjim101]

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

[othalan]

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.

[commoncents33]

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.

[strelna]

I am sure you are all being much too conservative over your longevity (hands up who wants an impella). What with IBB, oily fish and plenty of rat-poison, along with a supply of good brandy and the occasional cigar, we are all going to live forever. I am 65. I am sure I am good for 20 more years of brilliant (!) investing and that is a long enough horizon to be going on with.

[brittlerock]

This is an interesting thread, I could reply to at least a dozen different posts, so I’ll just pick one (not entirely at random).

I worked for a big aerospace firm that made it’s first aircraft delivery in 1911 (I think). That would be over 100 years in business. That’s a long time. Very few business entities survive 100 years. Did this company have a “durable competitive advantage”? And an equally important question is could anyone have predicted it at the time based on the available information?

It might surprise you to learn that at one time in it’s history this company (I’m assuming you’ve guessed its name) made furniture. Why would they do that? Simple, the market for airplanes evaporated. Management asked the question, what can we do to survive? At the time, airplanes were made primarily from wood and cloth. They had some of the most highly developed manufacturing scale wood-working skills in the world. They carried significant inventory of high quality woods. No one was buying airplanes, but people were buying furniture. They survived. Today they have greater revenue than several countries have GDP.

Once again, many years later due to a confluence of events the economy was thrust into “stagflation”. A stagnant condition of no growth coupled with rising prices. Government contract were canceled. Product sales disappeared. How to survive? Management looked at possible markets, capabilities, skills, available resources (there was no money for new investments). They found that there was a market for very large precision steel doors (gates, whatever) used in dams. Surprisingly, there were only a very limited number of companies worldwide that could make these doors. But in the end they did not go into this business, The overhead cranes in the factories could not carry the weight of these doors. There was no practical way to move work in progress without an enormous tool and equipment investment.

Draconian cost cutting was the only option. In a relatively short time management reduced employment of over 100,000 to less than 40,000. Contracts and open orders with vendors were canceled. The effects of the cost cutting rippled through the local economy. Houses were foreclosed as people walked away from their mortgages. Vehicles were repossessed by the thousands. Food banks were emptied. Unemployment benefits were exhausted, extended and exhausted again. Someone posted a billboard on the southbound interstate that read “The last person to leave town, please turn out the lights.” It was grim. But the company survived.

And once again on 9/11, the day that will long be remembered for the terrorist attack was another time this company’s management had to take decisive action in order to survive.

If the picture isn’t clear yet, you’ve not been paying attention. Products come and go and rarely serve as the basis for a company’s long term viability. They are not the thing that provides durable competitive advantage. Even primary line of business may change radically (remember, Berkshire Hathaway started out as a textile business). The company is the brand, not the products. It is management that keeps a company alive in difficult times. It is management that keeps a company alive through rapid technical revolution. In the 100+ years that the company I worked for survived, several big companies failed. Companies that were thought to be invulnerable.

Does SWKS possess a durable competitive advantage? Today, I’d answer that question with an affirmative. I think Aldrich and his associates have demonstrated an ability to anticipate where the market is going and have steered the company in a way that actually assists the market to move in the direction they anticipated. This management foresight was largely present through the history of the firm I worked at. IMO you will never know if a company is in possession of a durable competitive advantage until its survival is threatened. Management’s response to the threat is what ultimately determines its competitive advantage.

There’s a catch to this. Early in my career I was once counseled by a senior manager that he would rarely promote someone who often took dramatic, heroic action for the benefit of the company. He preferred the guy who very seldom needed to perform a miracle and who otherwise had a more boring record. His rational was that heroic actions were required during a crisis. If someone was frequently performing heroics, in indicated a lack of foresight and planning. He was always in reaction mode. He looked for guys who proactively averted the crisis in the first place, obviating the need for heroics.

[commoncents33]

IMO you will never know if a company is in possession of a durable competitive advantage until its survival is threatened. Management’s response to the threat is what ultimately determines its competitive advantage.

Any competitive advantage that depends on extraordinary management by definition cannot prospectively be considered durable, as managers tend to move, retire, and eventually die.

Any prospectively identifiable moat (and if it’s not prospective, it’s not much use to investors) must be based on inherent qualities of the business. Of course, having outstanding management can greatly increase the profitability and success of such a high-moat firm.

But like they say, you want to own a business so good that even an idiot can run it, because some day one may.

Related to this, there is wisdom in the Buffett saying that when a manager with a reputation for brilliance meets a business with a reputation for poor economics, it is the reputation of the business that is likely to remain intact.

[SaulR80683]

when a manager with a reputation for brilliance meets a business with a reputation for poor economics, it is the reputation of the business that is likely to remain intact.

ie. Yahoo.

[mnadel]

when a manager with a reputation for brilliance meets a business with a reputation for poor economics, it is the reputation of the business that is likely to remain intact.

e.g., J.C. Penney

e.g., Sears

[thejusticier]

"Any prospectively identifiable moat (and if it’s not prospective, it’s not much use to investors) must be based on inherent qualities of the business. "

keep in mind that a business do change also. The qualities that made a business so great may not translate when the environment changes. We know that there will be businesses in the future but industries change and current ways be management or the business out in itself may not continue to do well if there is no adaptation going on.
It is easy to say adapt or die but when you look at history forms dies to make place to newer ones better adapted to the new conditions. In a sense even if a business entity succeeds in surviving for more than 100 years, it is definitely not the same thing as it was at its beginning or 50 years ago.

tj