An update on Skyworks (SWKS) for 2017
Skyworks remains one of my largest holdings and a stock in which I have a great deal of confidence. As I see the prospects for the company improving this year I wanted to give an update on the company for my own perspective. This is primarily for my own learning experience so feel free to give feedback. I hope also this can help out others interested in SWKS.
Skyworks (SWKS) Company Overview
My own understanding of the company at a simplistic level:
Skyworks designs, develops and manufactures analog semiconductor devices with the primary focus of solving wireless connectivity challenges.
SWKS Revenue History (in Millions):
Q1 Q2 Q3 Q4 YEAR YoY Growth
===== ===== ===== ===== ====== ==========
FY2013 454.0 425.2 436.1 477.0 1792.3
FY2014 505.0 481.0 587.0 718.0 2291.0 27.8%
FY2015 806.0 762.0 810.0 880.8 3258.8 42.0%
FY2016 927.0 775.1 751.7 835.4 3289.2 0.9%
FY2017 902.7 851.7 *890.0**
* SWKS Guidance for next quarter
SWKS Earnings History (Non-GAAP [Adjusted] Diluted EPS)
Q1 Q2 Q3 Q4 YEAR YoY Growth
==== ==== ==== ==== ==== ==========
FY2013 0.55 0.48 0.54 0.64 2.21
FY2014 0.67 0.62 0.83 1.12 3.24 46.6%
FY2015 1.26 1.15 1.34 1.52 5.27 62.6%
FY2016 1.60 1.25 1.24 1.47 5.56 5.5%
FY2017 1.61 1.45 *1.52**
* SWKS Guidance for next quarter
The Elephant in the room: 2016 was abysmal!
Before I continue, lets address the elephant in the room: Yes, 2016 was horrible. To my understanding, this was primarily a combination of a difficult year for their primary client (Apple) and generally bad economic conditions leading to lower sales across the entire market. The stock price remained essentially unchanged for the duration of 2016, though thanks to volatility good entry points were common throughout the year.
The prospects for 2017 are improving significantly as I will discuss below.
Why is Skyworks Special?
Skyworks management has two focuses which are the primary reason I am invested in this company:
(1) Analog Semiconductor Specialization.
Analog signal processing is seen as a bit of a “dark art” in the electrical engineering world. It takes a great deal of expertise to do right and does not have the easily quantifiable characteristics of more common digital signals. Many signals can be processed as either analog or digital signals. As a result it is common to convert a signal to digital as soon as possible in order to take advantage of this simplicity. However, analog has many advantages, especially as wireless communication becomes increasingly common. Modern cell phones and IoT devices must now use analog chips in order to provide the highest level of performance end users demand from devices.
(2) Working with customers during device design.
Most companies create a product then offer it to the market. Skyworks has taken a different approach: Work with customers during their product design phase to find out what unique solutions can be created to meet their product needs while saving the customer money along the way.
The Risks
Here are a few risks I see for investing in SWKS. This list is by no means comprehensive!
- Competition: While the their product and service is unusual and specialized, they are not unique.
- Commoditization: Some day in the future current SWKS products will be come commodities.
- China Exposure: China is a large and rewarding market but risky by nature.
- Small number of customers: Apple accounts for close to 40% of sales.
- Cyclical Industry: Demand for products depends on client device sales and new technology developments.
- Difficult to Understand: Analog semiconductor devices are a difficult technology to understand.
- Never the master of their own fate.
That last requires more detail. As Saul pointed out at one point, Skyworks will never be the master of their own fate. Their customers are other companies. This distance from end users means that Skyworks has limited ability to influence their level of sales compared to a company like Amazon whose potential clients include anyone in the world they can ship a package to.
The Road Back to Growth: 2017 & 2018
2016 was a low point in the cyclical industry. 4G had been rolled out by their largest customers, 5G was still somewhere in the future, and new cell phones by both Apple and Samsung were relatively minor updates.
2017 is already looking better. New business has come in and IoT continues to expand. Best yet, 5G is finally arriving. The Samsung Galaxy S8 recently released with 5G support and the iPhone 8 later this year is likely to support 5G as well (rumor only at this point). Not many places 5G can be used at this time but that will change and will likely be a large driver sales of new devices.
This hope for the future can be seen in the fact that SWKS has already risen 35.9% this year.
The IoT Trend
IoT is one of the best hopes for the future of Skyworks. There are arguments worth considering that the growth potential for the cell phone market is limited but IoT is just barely beginning and is growing fast. Skyworks management is aware of this and are deliberately focused on growing the IoT side of their business.
Conclusion
I am very hopeful for my SWKS investment. The most recent quarter (FY2017/Q2) was very good and provided hopeful guidance. Best yet from my point of view, the market was disappointed at the good results (most likely a case of “good but not good enough”). Which on further reflection is a reasonable reaction as I had already thought previously that the market was being unreasonably hopeful for the short term future.
Looking forward I see SWKS likely returning to higher growth later this year and continuing through next year (FY2018). While the current price is not a particularly attractive entry point, it is entirely possible a better price may not be seen unless a more broad market correction occurs.
David
Long SWKS