What makes Skyworks special?

This snippet from a long excellent post by DataBase Bob puts it perfectly:

Skyworks Solutions is aptly named because it sells multi-component, tailor-made “solutions”, rather than individual products. This is a huge advantage, because the individual components are typically commoditized. But the integration of the components into a tailored solution adds value and Skyworks commands good margins. Skyworks’ prowess in designing these solutions keeps customers coming back rather than trying to buy individual components more cheaply and design the integration themselves.

Isn’t that just perfect?

Saul

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Hi Saul - IRF was claimed to operate an exact same strategy, custom designing its products into client systems. They stagnated for a decade though as they could not handle competition and commoditization.

Sounds good but still needs to be watched like a hawk. I’m convinced of the story and its impact on margin but I’m less convinced about the sustainable moat this provides.

Clients may not be able to compete with Skyworks customization but others can be designed in to replace them.

I hope not and hold.
Ant

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Saul - don’t buy much into any of those fluff. This is RF amplifier company. There are half dozen players who build such products and valid suppliers to SWKS customers.

SWKS doesn’t have any type of lock on customers - no architecture lock up, no SW lock up, no design tool lock up, no ease of use lock up. For any customer, changing RF from SWKS to someone else is a matter of few weeks engineering work - it is a barrier but not large.

Fundamentally, SWKS has no technological or process differentiation.

So why are they successful. They have executed better… The have Outworked competitiors… And built operation of scale that’s, partly thanks to Apple, is difficult for competitors to match. They can out price others and still make money. And they have done all of these while their market has been growing… So yes, it’s amazing.

Can this type of advantage last? Yes as long as they stay on top of execution. Temporary slack / trouble for one or two quarters can permanently open up huge entry for a capable competitor. And investors can’t find out until it’s late (can’t get pre-warning to loss of important platforms that affects revenue two to four quarters later.

I like SWKS and I am long. However, I want to be alert and jump out if performance degrades. Also don’t buy into PMC acquisition. They could do better with that money.

Nilvest

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Saul - don’t buy much into any of this fluff. This is a RF amplifier company.

Hi Nilvest, thanks for the cautionary words. I’ll keep them in mind. I see it a little different. To quote again from DataBase Bob

I feel strongly that the Internet of Things (IoT) will be a powerful force in the next ten or more years, and I think that Skyworks is well-positioned to ride that wave. I’m encouraged that the market mostly seems to ignore this potential, typically describing Skyworks as an “Apple supplier”. That’s true, of course, and it’s important. But it doesn’t, in my opinion, accurately describe the company’s potential.

You wrote that it would be a matter of a few weeks for them to be designed out and replaced by a competitor. Sorry, but I think that’s totally wrong. They have often described how they are in on planning often two to three years ahead. They provide a complex solution for which they are able to charge more, not less. They wouldn’t have 50% margins if they had to fiercely compete on price.

You also warned to stay alert for signs of performance degrading. I always DO, which is what sets my method apart, I think, and certainly annoys the Hold Forever people.

Best and thanks for your post.

Saul

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SWKS and AVGO made a pile of case mainly of APPL, through RF and IBAR filter components. They make these components well, I thought they were the only guys who made these components, but perhaps nilvest makes a better point. The IPhone6 pre-orders had both companies rolling in cash.
I think the same had happened with NXPI.

AVGO acquired LSI for it’s storage divisions- enterprise and consumer, the former providing a more steady revenue stream, and off late growing due to Datacenter growths. The reason for the acquisitions were to diversify the revenue stream.
After the acquisition AVGO’s the enterprise storage division has actually grown even more. The enterprise storage space has two main players, LSI and PMCS, with LSI being the more dominant. I think SWKS acquired PMCs for the same reason. The question now is will they be able to integrate PMCs well and grow the division to justify the acquisition.

Kris

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Hi Saul, I agree, you are always watchful on actual performance rather than opinions and forecasts. That’s been an eye opener to me after studying this board more carefully and regularly. It’s been great learning thanks primarily to you and also others including Nevercontent, flethc, gauchochris and others.

SWKS absolutely has great execution… At a perfect time when demand for their products increasing… And that’s strong reason to stay invested…
I just don’t buy into the fluff (of being in the customer planning process because I know their competitors are there too).
Anyway, I don’t mean to rehash. I think summary of my points is just to stay cautious which you already are.

Hi Kris, it’s a good point of SWKS trying to diversify in similar fashion to AVGO… However, they are very very different management… Avago has history of diversifying under current management and they are in the process of closing deal with Broadcom that will also name the company as Broadcom. I trust Avago management a lot more to successfully execute on expansion via merger route, it’s proven. SWKS management is trying this first time (at-least in such a big scale) with PMC and jury is out on how will this pan out. Combine this with really different product lines, customer base and culture of PMCS, provides me another reason to be cautious on SWKS.
Again in short term, SWKS can keep doing well but if we think three years span, there is a lot of uncertainty here.

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any company in the Skyworks line of business is not a buy and hold , a “they have some massive competitive advantage, the tech is in it’s infancy , they are fixing a broken process” type business. I would be very surprised if I still own SWKS 5 years from now.

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