SWKS Race to Bottom?

All,
One stock that has been hotly contested in the past is Skyworks Solutions, Inc. The question is whether SWKS is in a race to the bottom? Will its margins evaporate? TMFCochrane has done a great tracking revenue, margins, and revenue.

http://discussion.fool.com/skyworks-solutions-reports-2018-q1-32…

You can see from his non-GAAP operating margins that margins are actually increasing. I have tracked them back to Q4 13. The operating margins have been on a continual march upward from Q4 2013 when it was 27.3% to now where it is at 39.4%.

So you ask “If margin expansion is so great, why hasn’t revenue and profit increased at the same rate?” The answer is inventory control must be pretty good. While the overall cell phone market cooled in Q1/Q2 17, SWKS margins remained relatively unscathed.

Maybe you are also asking “Is the smart phone market saturated?” Based on Apple’s last earnings report and projections, I think there is a good argument that it is. In spite of that, SWKS estimates forward earnings at 1.60. I have been following them since 2014, and I can’t remember a time when they have not beat their own estimates. SWKS estimates a forward PE of 15.0 and a PEG = 0.71

Why should I care about undervalued growth stocks now? To be clear, I own ANET, SHOP, NVDA, SQ, MELI, ALGN so absolute growth is a critical part of my investments. However, in down markets, GARP stocks tend to outperform pure growth stocks so you may be very happy with this value proposition come December this year.

You may say to yourself “I want dynamic growth for the future, why should I own a business that appears to be stagnating?” or "Any catalysts for growth in SWKS future? Absolutely! They are set to profit from 5G filters like no one else. They appear to be rapidly diversifying away from cell phones so I think the best is yet to come.

What about competition? SWKS may face significant competition from Qorvo. So far SWKS margins have held up fine, and Qorvo is lowering guidance, but they have mentioned contract wins with APPL. Currently, SWKS has an operating margin of 39.4% and Qorvo is at about 2.3%. Qorvo is a concern, but has not yet cut into SWKS margins. Qorvo is a primary beneficiary of INTC’s 7360 chipset, but SWKS has more content with QCOM so if QCOM limits the sale of INTC chipsets, SWKS should benefit. Qorvo also claims to be ready for 5G. I view this similar to NVDA vs. AMD. That said, I am not an electrical engineer, and I do not have direct technical knowledge about each of their product portfolios.

Anything else? As a result of the reduction in corporate taxes, SWKS plans to repurchase $1B worth of stock, or 5.3% of its stock based on today’s market cap. Also, it is increasing is capital return program to 60 - 75% of free cash flow (warms my heart) which is currently sitting tracking at $1.47B/year.

To sum things up, SWKS has not seen margin pressure from Qorvo. Over the last two years, it has had solid, but unspectacular earnings, but is well positioned for growth over the next 3 years. The frothy market, low valuation, and potential for leadership with 5G connectivity applications makes this a good time to consider or reconsider SWKS.

Best,

bulwkl

PS Long SWKS because I can’t stand to sell anything before my thesis plays out.

PPS Another GARP stock that I believe should be on everyone’s radar is CELG. I will try to write up my thoughts on that another day.

33 Likes

On CELG:

http://discussion.fool.com/celgene-duma-32968537.aspx?sort=whole…

(I’m not a bear ALL the time!)

Looks like fuma already posted the CELG link that immediately jumped to my mind.
After doing my pseudo-stock replacement with CELG last week and seeing the price drop further, I’m almost tempted to add some more exposure…maybe with the June 2019 strikes to still be able to make it long-term but not go all the way to the Jan 2020’s.

What does GARP stand for? I tried figuring it out by wracking my brain, but gave up.

What does GARP stand for? I tried figuring it out by wracking my brain, but gave up.= Growth at a reasonable price.

Rob

GARP = Growth At a Reasonable Price.

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Thanks

I’ll add that one to my acronym vocabulary.

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Yup. Growth at a Reasonable Price. I should have clarified that in my post.

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Great post, bulwnkl. I think you’ve got it exactly right. I think Skyworks is a long-term winner, as IOT and 5G will give the company tailwinds for years to come. Last month, I wrote an article on the bull case for the comapny and concluded:

In the short term, the company continues to trade on Apple rumors and speculation, because the smartphone maker is such a huge customer of Skyworks’ products. For instance, when news leaks that an Apple supplier factory manager’s nephew’s former college roommate said they heard that the iPhone X wasn’t going to be as big of a supercycle as previously thought, Skyworks shares will often dip that day. But, in the long term, investors need to realize that Skyworks Solutions is going for a reasonable valuation while poised to capitalize on some of the greatest industrial trends in the world today. In today’s market, that is about as a good of an investment as you’re going to find.

From https://www.fool.com/investing/2017/12/15/time-to-get-greedy…

Matt
Long SWKS
MasterCard (MA), PayPal (PYPL), Skechers (SKX) and Square (SQ) Ticker Guide
See all my holdings at http://my.fool.com/profile/TMFCochrane/info.aspx

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I still own a relatively small position in SWKS and am trying to decide what to do with it.

Whenever I consider adding to the position, the customer concentration risk holds me back. This is probably a good reason to sell the position. If I’m not mistaken, the company has a long ways to go before Apple would be a small customer, say less than 10% or even 20%.

Their fortunes could change at Apple and Apple, as volfan pointed out, is glaringly missing from their press release. That doesn’t make one feel too terribly comfortable irrespective of how the company is looking to position themselves to investors as being diversified. They are not.

Skyworks is a position I don’t know what to do with currently.

A.J.

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AJ,
All I can say is that APPL is gradually getting smaller. I don’t have hard numbers now, but we can say SWKS is fairly agnostic to the smart phone market having relationships with not only APPL, but Samsung and the Chinese phone makers too. So long as we are confident that Qorvo isn’t taking over the smart phone market, things should be fine. Devices will become bigger and bigger portions of then SWKS pie.

IMO the water is fine, why not take a plunge?

Best,

bulwnkl

2 Likes

Their fortunes could change at Apple and Apple, as volfan pointed out, is glaringly missing from their press release.

FYI, Apple is always missing from its press releases. Even on its earnings calls, Skyworks just refers to Apple with generic “biggest customer” boilerplate or to Foxconn (because Skyworks’ SOCs go to Foxconn who then put the chips in the phone - so technically Foxconn is its customer).

But, yes, customer concentration is definitely Skyworks biggest risk. I don’t think its likely Apple takes that capability in-house, but I am loathe to say never. But, I’m like blwnkl, Apple becomes less of a percentage of total revenue every quarter, even as Skyworks grows its dollar amount in each new generation of iPhones.

Matt
Long SWKS
MasterCard (MA), PayPal (PYPL), Skechers (SKX) and Square (SQ) Ticker Guide
See all my holdings at http://my.fool.com/profile/TMFCochrane/info.aspx

1 Like

But, yes, customer concentration is definitely Skyworks biggest risk. I don’t think its likely Apple takes that capability in-house, but I am loathe to say never. But, I’m like blwnkl, Apple becomes less of a percentage of total revenue every quarter, even as Skyworks grows its dollar amount in each new generation of iPhones.

Appreciate the input bulwnkl and MC. The transcript hasn’t posted yet on Seeking Alpha if they are still doing that sort of thing with their recent changes. Hopefully, that doesn’t change.

I’m going to, at least, read the transcript before making any further decisions. Based on my history of making decisions on SWKS, I can almost be assured it will be the wrong decision. A pretty poor track record on this one.

Regarding Foxconn’s percentage declining, I do see that, but there seems to be a long ways to go before it would be anywhere near immaterial so that doesn’t give me much solace. This is all from memory and not verified recently, so maybe I’m wrong.

Take care,
A.J.

The Fool has been releasing more conference call transcripts lately and I generally find them of better quality than Seeking Alpha’s. Here is Skyworks: https://www.fool.com/earnings/call-transcripts/2018/02/05/sk…

Based on my history of making decisions on SWKS, I can almost be assured it will be the wrong decision.

If whatever you do is wrong decision, then please sell! LOL

Some stocks I have horrible luck with, some great luck. Skyworks has been great for me. Bought the bulk of my position in the $60s and $70s about 2 years ago (if I recall correctly). But added more early this year when it dipped below $100.

I really do believe it is undervalued here and will make for a good long-term winner. But I’ve been wrong plenty of times before too!

Matt
Long SWKS
MasterCard (MA), PayPal (PYPL), Skechers (SKX) and Square (SQ) Ticker Guide
See all my holdings at http://my.fool.com/profile/TMFCochrane/info.aspx

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Matt,

Where can we find the earnings transcripts on the Fool? Didn’t know they are doing that and couldn’t find them anywhere.

Thanks for all you do.

Brian

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If it were not for Apple, I’d be all over SWKS. Cannot say if I would buy it or not as it takes me more time, and trying it on first and then comparing it to alternatives, but I did start looking into it more, and when I saw just how high the Apple concentration was, I just said, very simply and calmly, “no.”

Over the years I have seen many companies, all just generic to me now, that had similar circumstances, so much promise, until their largest customers switch to other vendors (GoPro is a recent example), or take more in-house, or change their products or whatever.

SWKS seems less likely to be replaced by Apple, and SWKS has far more going for it outside of Apple than these other companies, but it is still a huge concentration. I just did not want to go there.

I have also been in other companies that had market monopolies are advantages because a competitor will never be able to do x, y, or z, and except for ISRG, almost all of them ended up having competitors eventually able to do x, y, or z.

Just not somewhere I want to go when there is such a large part of valuation that is outside of a companies prediction or control and will always weigh on the valuation to some extent until the risk materially diminishes.

Tinker

9 Likes

If you plot an overlapping chart of Apple and Skyworks for the past 2 years, you will see how close these two stocks move in sync. Every time Apple sneezes, SWKS catches a cold. So in essence, they behave like the same stock with similar ROI i.e. more Apple allocation. Do you need both now?

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I have a 2.6% position in SWKS myself. I hope the company grows a lot from here. I’m up 21.26% so far.

Fool on,

mazske

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Brian,

When I wrote about FB conference call, I googled for the transcript and the Fool came up. If I search in the search box, I can find them here.

Fool on,

mazske

Long FB

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Tinker,
Over the past few years, its true that SWKS moved in sympathy to APPL price & rumors. One reason that SWKS may be up is that its guidance is barely reduced (earnings projections from 1.63 to 1.60) even though APPL is dramatically reducing iPhone shipments. Does that sound like over dependence to you? On top of that, SWKS margin is consistently climbing. SWKS doesn’t give enough detail to know for sure, but it is looking more and more agnostic to any one brand of smart phone, and growing in connected IOT devices strongly.

Best,

bulwnkl

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Re-visiting this post from early February, in light of Apple’s latest quarter, with Skyworks announcing Thursday.

Yesterday probably would have been the optimum day to buy Skyworks shares, I am thinking. That matches up with when my own fear was the highest, to borrow from what Saul described about some of the past market crashes.

volfan84
long Skyworks, also May 18 $100 and $105 call options