Their revenue is %76 fully depended on SmartPhones.
Thus only 24% is allocated to what is called IoT.
The growth from SmartPhone is almost exclusively depended on China.
China is in a transition from a Manufacturing based economy to Service based economy.
This transition is having some severe problems.
As a result the Chinese economy is slowing down substantially.
Thus the Earning Per Share growth of SWKS is at a real danger.
If someone disagree with one of the above points (maybe I’ve got a fact wrong here — I personally think that I am on solid ground here).
The Chinese slowdown is likely to take a prolonged time and with it the EPS of SWKS is going to suffer.
Thus SWKS should be observed as a value stock more than a growth stock and should be treated as such.
The only question left is the price of SWKS includes all these bad news or not.
IMHO SWKS EPS in the future quarter are destined to suffer from the Chinese slowdown (and it is substantial not something that could be waved.)
In this kind of conditions SWKS is likely to loose its momentum and be punished by the market.
Thus I sold all my positions on Friday when the stock was up more than one percent.
The counter argument can be that this is all baked to the current price of the stock.
I don’t believe it is and thus I am out. I wish the ones holding this company good luck as a I believe they really need it now.
I like to see the bear thesis and your post did a good job of presenting that. I want to focus on the Chinese economy for a moment. As you mentioned, it is transitioning toward a service based economy.
While there may be some tumultuous times ahead, this should generally be a good thing for all things related to connectivity along with smart phones. A service based economy needs connectivity. The transition to 4G is underway and will benefit SWKS greatly.
Lastly, the size of the Chinese population makes me bullish on SWKS. If China is converting to a service based economy, more people are transitioning to a life requiring connectivity. Even if the economy struggles to a certain extent, the population is migrating toward the future.
Certainly if the Chinese economy fails a al the Great Recession, there will be problems for SWKS along with many, many companies. I don’t think the government, which by the way can do anything it wants, will let that happen.
I just wanted to provide my outlook on China as it relates to your thesis. I appreciate you bringing the topic to light and would like to know if others think I’m crazy for my beliefs about the Chinese economy as it relates to SWKS.
A.J. thanks for the post.
If you accept the fact that China is slowing down substantially, then it would be extremely hopeful that the sales of SmartPhoone will not be affected.
Upgrade to 4G provides more profit for SWKS and will continue to happen.
During this transition, the Chinese population will continue to upgrade their phones irrespective of the manufacturer of the phone which benefits SWKS.
A Chinese service economy, even one that is declining on a GDP basis, is still growing connectivity.
This is a trend that is taking place world wide.
I’m still interested in what you and others have to say.
I think looking beyond what the company is doing and looking into Macro Trends is a losing game. The modeling is too complex for even math geniuses with super computers.
However, if one wants to pursue Macro Econimics, and the future of China, I suggest he start here:
While anti-aging may seem off the path, this quote is important:
For those of us living in the US, it’s easy to be pessimistic. But we shouldn’t be. The silver lining is much brighter than the cloud is dark. While economic growth has stagnated in much of the developed world, the rest of the globe has made breathtaking progress in the last few years. The following graph, from Our World in Data, dramatically describes the pace of global economic progress.
Again, my experience has been that there are NO investable takeaways from MACRO Economics. However, they can prepare your mind to take advantage of companies, like Skyworks, or Skechers when the solid company profits present themselves.
If you wish to consider this more, and while it is not investable, nor really pertinate to this board, it is better than watching TV, I invite you to post on the METAR board, the old curmudgeons over there need new bones to gnaw on anyway.
1) Upgrade to 4G provides more profit for SWKS and will continue to happen.
The above statement can be written in a more simple to understand and analyze statement:
Chinese citizens will buy new smartphones that support the faster LTE standard.
This means that they have to buy new more expensive smartphones.
During economic slowdown people tend to delay purchasing items unless they absolutely need them. Faster and stronger smartphone are in the nice to have category (IMHO) thus it is going to be delayed.
Thus SWKS sales are going to be less strong than previously anticipated.
I really hope that Aldrich in the upcoming quarterly will address this issue. If he effectively does, I will change my mind. If on the other hand he doesn’t know or agrees with the above thesis (in the form of cutting guidance for 2016) I will maintain my opinion.
shukisasson: The growth from SmartPhone is almost exclusively depended on China.
tamhas: Why?
I spent a long time debating the China risk. Here are some of my own thoughts:
SWKS has a large market in China which has been expanding fast. Here are some numbers from the most recent 10-K:
Net Revenue by Region
===========================================
2015 2014 2013
---------- ---------- ----------
China $ 2,249.2 $ 1,574.4 $ 979.3
Total $ 3,258.4 $ 2,291.5 $ 1,792.0
China% 69.0% 68.7% 54.6%
===========================================
This does show a large exposure to China which is identified as a risk in their 10-K which begins with the blatant statement: We are particularly exposed to risks of doing business in China.
I always have mixed feelings about China. I’ve heard lots of hype about the opportunities in China and lots of fear about the dangers, particularly around government interference and economic troubles. I tend to view both extremes with skepticism, especially in the world of today’s media where strong emotions are used to manipulate audiences for profit. In reality, China’s economy is far too complex to guess at where it is headed.
Yet I see good reason to be optimistic about SWKS exposure to China. SWKS produces a small and boring component used in both luxury models and low-end affordable models. This indicates Skyworks has at least the potential for opportunity in both good and bad economies. Assuming mobile computing is more than just a passing fad, of course.
Yet the most compelling argument to me is that Skyworks management seems both trustworthy and aware of the risks of their exposure to China. Yes, there is risk. The rewards of that risk are why I am in this stock. Everything I have learned indicates management has done its best to mitigate its own risk which thus mitigates my risk as an investor.
Thank you for posting the bear thesis.
Who manufactures the chips for android phones?
It would be informative if their stock price is similarly tanking
usha
The above statement can be written in a more simple to understand and analyze statement: Chinese citizens will buy new smartphones that support the faster LTE standard. This means that they have to buy new more expensive smartphones. During economic slowdown people tend to delay purchasing items unless they absolutely need them. Faster and stronger smartphone are in the nice to have category (IMHO) thus it is going to be delayed. Thus SWKS sales are going to be less strong than previously anticipated. I really hope that Aldrich in the upcoming quarterly will address this issue. If he effectively does, I will change my mind. If on the other hand he doesn’t know or agrees with the above thesis (in the form of cutting guidance for 2016) I will maintain my opinion.
I would like to hear what others have to say which will let us know if this conversation is beneficial. I, for one, believe the need for connectivity will increase. GDP growth will certainly help, but isn’t a requirement for growth in this specific sector.
If someone disagree with one of the above points (maybe I’ve got a fact wrong here — I personally think that I am on solid ground here).
Smartphones are the gateway to connectivity and the world is becoming increasingly more connected. Smartphone growth may slow a little from its previous pace, but it is far from over.
Even if China is slowing down, I don’t believe that it will make a significant dent in the sales of smartphones. A smartphone is more than a tech device. It is part jewelry and an important status symbol. People will not easily give that up.
On the other hand, the market is negative on SWKS and you have to respect that. The wisdom of crowds has a long and impressive track record inside and outside the world of stocks.
This is from the last CC, bolding is mine. I think it has been posted before but I think it is relevant to the discussion about slowing smartphone growth. Asked and answered. FWIW, Aldrich has been saying the same thing now for the last 6-8 quarters as they keep beating expectations and I expect to hear the same things again for the next 6-8. If you haven’t, I recommend going back and reading these transcripts.
Atif Malik (Analyst - Citigroup): Hi, thanks for taking my question and congratulations on another strong quarter. Dave, a question on the gross margins. If I look at other component makers in smartphone market application processors, those guys are talking about ASP pressures next year, and you plan to expand your gross margin. Help me understand why the pricing environment or the gross margin profile for RF guys should remain strong into next year in a decelerating year-over-year smartphone unit environment? Dave Aldrich (Chairman & CEO): It’s relatively simple. It isn’t a year-over-year, part-to-part comparison. We are increasingly integrating more functionality as these devices get more complex, and we’re seeing fewer competitors able to do it. Customers can’t handle discrete components any longer, and that level of integration required to have a product that consumes low current. That’s small. That is highly integrated requires many, many different functional blocks with process technology know-how pulled together in a low-cost manufacturing platform with great system architectures. So, we are able to work with our customers to give them a differentiated system performance which is increasingly becoming analog and RF-dependent. Less digital and more analog and RF-dependent. And, that’s our sweet spot. And so, our customers, it isn’t as if we’re charging our customers more per se per function, it’s that they’re giving us more of the system requirement. And, they’re paying us for it because we generate a great – we add a great deal of value for them.
I think about it like this. Would I rather have a market where a million smartphones sold and I have $1 or so in content or would I rather have a 50% smaller smartphone market where I had $3-4 in content in each phone.
Yet the most compelling argument to me is that Skyworks management seems both trustworthy and aware of the risks of their exposure to China. Yes, there is risk. The rewards of that risk are why I am in this stock. Everything I have learned indicates management has done its best to mitigate its own risk which thus mitigates my risk as an investor.
Thanks for this enlightening post.
There is an additional bit of information coming from checking the channels that says that smartphones sells are stagnating if not slowing down.
Together with the China slowdown is enough evidence for me to stay on the sidelines waiting for the sky to clear
Brian, What a great quote from Aldrich. We should frame it and put it up on the wall! It’s amazing that there are still so many people, and even analysts, that don’t “get it”!
Saul
It’s relatively simple. It isn’t a year-over-year, part-to-part comparison. We are increasingly integrating more functionality as these devices get more complex, and we’re seeing fewer competitors able to do it. Customers can’t handle discrete components any longer, and the level of integration required to have a product that consumes low current. That is small. That is highly integrated. That requires many, many different functional blocks with process technology know-how pulled together in a low-cost manufacturing platform with great system architectures.
So, we are able to work with our customers to give them a differentiated system performance which is increasingly becoming analog and RF-dependent. Less digital and more analog and RF-dependent. And, that’s our sweet spot. And so, it isn’t as if we’re charging our customers more per se per function, it’s that they’re giving us more of the system. And, they’re paying us for it because we add a great deal of value for them.
You mentioned this Chinese slowdown about 3-4 times and this seems to be the main reason for your view that SWKS is in danger. China, though, is not in a negative growth situation. Their economy is showing one of the most positive growth percentages in the world. It is really a deceleration and not at all a negative growth. And if the deceleration is in large part due to decreased infrastructure spending, slower manufacturing output, lower exports, less buying of copper, steel, etc. AND it is still showing 6-7% overall growth imaging how fast the consumer economy in China is growing. People are spending more and more money and part of that spending goes to things like phones (SWKS), shoes (SKX), and other things that people buy. Add on top of this that their transition from 3G to 4G was only 20% complete recently. This means that there are A LOT of peoples that people in China will still be buying. Just my opinion…
Net Revenue by Region
===========================================
2015 2014 2013
---------- ---------- ----------
China $ 2,249.2 $ 1,574.4 $ 979.3
Total $ 3,258.4 $ 2,291.5 $ 1,792.0
China% 69.0% 68.7% 54.6%
===========================================
othalan,
This table is misleading because it reflects where the OEM products are manufactured, not sold. SWKS products are bought in China, integrated into products there, and then sold throughout the world. The exposure to China end users of mobile devices and other products that contain SWKS components is much, much smaller than 69%. I think Aldritch said on Cramer a few months ago that the market exposure (i.e. people purchasing products with SWKS stuff in them) is more like 20%.
