Buy Chipmaker Skyworks Solutions at a Discount
Oh, the drama of a cutting-edge chip maker:
Skyworks Solutions (SWKS) - Get Report soared 156% from October 2014 to peak around $113 a share in June. One of the leading providers of radio frequency (RF) semiconductors used in cellphones, Skyworks shares then sold off as China stumbled and smartphone growth there slowed. Shareholders had a steep ride down, and in August the stock traded to a low of $70.80.
But Skyworks has a bright future, and at a recent price of about $78, it's a bargain when you consider its expected earnings growth. On fiscal 2016 (ending September) consensus earnings-per-share estimates of $6.15, Skyworks has a forward price-to-earnings ratio of 12.6, below the expected growth rate of 16.7%. This up-and-coming tech stock proves that there are still ways to profit from chip-making aside from the legacy names of Intel and Advanced Micro Devices.
Skyworks is a great opportunity now; here are the trends working in its favor:
- China is adopting the faster network technology, LTE, in which Skyworks excels.
- Growth in emerging markets phone sales.
- An expansion of the "Internet of Things," which is expected to become literally billions of devices that will need the kind of chips Skyworks sells.
Even as smartphone growth rates decelerate, Skyworks benefits from having a higher revenue share in each handset. Plus, the company has a more balanced RF business across a variety of handset makers when compared to other RF players, providing it with good diversification when it comes to selling to China.
Skyworks recently made a move to further diversify its products with a planned $2.2-billion acquisition of PMC-Sierra, a provider of semiconductor and software for the storage, optical and mobile networking markets.
The purchase is a smart move into adjacent markets, giving Skyworks more exposure to the big data mega-trend. The company plans to leverage PMC-Sierra's solutions to expand its engagements with some of the world's largest original equipment manufacturers as well as with emerging hyperscale datacenter customers.
While Microsemi has made a competing bid for PMC-Sierra ($11.88 a share in cash & stock, vs. $11.60 a share in cash from Skyworks), the Skyworks offer looks more compelling because of the all-cash terms. Both the Skyworks and PMC-Sierra boards have approved the deal.
Skyworks expects the PMC-Sierra takeover to immediately add to earnings once the deal closes, which is likely to take place in the first half of calendar 2016. After saving $75 million in annual costs within 12 months, the acquisition is expected to result in roughly 70 cents of increased annual earnings-per-share on an annual basis -- that's 11% of the current 2016 consensus earnings-per-share estimate.
Including PMC-Sierra, Skyworks is forecasting annual revenue of more than $4 billion, with gross margin of roughly 55% (up from 49% in the June quarter) and operating margin exceeding 40%, vs. 36.5% in the latest quarter.
The chipmaker is seen as a leader in solving complex integration issues, managing the coexistence of multiple common protocols. It has unmatched system design capabilities, extensive product breadth in core enabling technologies and advanced production techniques to enable highly customized solutions. Skyworks is being brought in earlier in design cycles, giving customers even more customization opportunities.
In high-performance filters, the technology edge at Skyworks allows better system performance via tighter band spacing with improved isolation and a more efficient signal path, meaning customers are embedding significantly more capabilities into progressively smaller footprints (more performance into smaller devices), while pushing for higher performance and improved battery life, says Skyworks CEO David Aldrich. He points out the company is seeing this broad trend across mobile devices, the connected home, the automotive sector and in manufacturing use cases. Skyworks these days is also doing more power management and voltage control. By controlling the voltage that a power amp sees on the input side, the chipmaker is able to provide better consumption and efficiency, says Aldrich, meaning longer battery life for your phone.
The main content expansion trend is taking place in the smartphone segment, as 4G handsets have two-to-three times the content of 2G and 3G phones. Analysts at Oppenheimer argue increased RF content remains an early-stage story, with band counts rising as 4G penetration deepens. For example, the new iPhone 6S has built-in support for up to 23 4G/LTE bands, vs. 20 in the iPhone 6. It's estimated that Skyworks' average content for a 6S handset is now around $6.50, vs. $5.50 for the prior version.
And if you're looking for other small-cap tech stocks about to soar, click here.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.