Jim Cramer says there is "a quiet bull market" emerging in semiconductor stocks. He's right -- and Skyworks Solutions (SWKS - Get Report) is underappreciated.
As TheStreet's Jim Cramer, Portfolio Manager of the Action Alerts PLUS Charitable Trust Portfolio, wrote on Real Money, "The semis are back, and they can be a real leadership group. Bet with them, not against them, and I think you will do just fine into the year's home stretch."
Year to date, shares of Skyworks Solutions are up 15%, but down 26% from their 52-week high. The stock has been hurt by two factors: investor fixation on Apple's (AAPL - Get Report) iPhone sales and the potential acquisition of PMC-Sierra (PMCS) .
Last Friday, Skyworks dropped its bid to buy PMCS after the company accepted Microsemi's (MSCC) cash and stock offer of $2.5 billion. Microsemi agreed to pay a steep 77% premium to PMC's Sept. 30 closing price. Skyworks said at the current price the deal isn't financially viable.
Skyworks had been caught up in a bidding war that caused investors to worry about the cost of the acquisition and integration risk. But now that Skyworks has dropped its bid, management can get back to focusing on the company's main business.
Jim Cramer said, "I think that the buyback and the dropping out of the acquisition pursuit of PMC-Sierra represent the base, the bottom, of the stock after a very long run down."
Real Money's Bruce Kamich was in agreement too. Conducting a technical analysis of the stock, he said, "This bottom could propel SWKS higher into early 2016."
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Investors have been overly concerned about the relationship between Skyworks and Apple. I don't think they need to be. Apple is Skyworks' largest customer and accounts for about 34% of Skyworks' revenue. Investors are concerned because at one time Samsung (SSNLF) represented 17% of revenue, but has steadily dropped below 10% as Samsung switched to other suppliers. Investors are afraid that Apple will eventually design out Skyworks or that iPhone sales will slow after the holidays and Skyworks will get hit hard by slowing demand.
But I think investors are missing two crucial points.
First, Skyworks has been gaining market share in the iPhone. Analysts estimate Skyworks had just over $3 in parts in the iPhone in 2014. But with the new iPhone 6s, analysts estimate Skyworks has over $5 in content in the iPhone. I don't think investors appreciate how complex smartphones are getting and how fast Skyworks is gaining market share within the average smartphone. In the average 3G phone, Skyworks has about $1 or $2 in content in each phone. But with a 4G phone, Skyworks contributes over $3 in content. And with more advanced smartphones right around the corner, Skyworks should have well over $5 in content in each phone.
As phones grow in complexity, manufacturers are increasingly turning to semiconductor makers who can supply entire integrated mobile systems, like Skyworks. Within the next two years, the integrated market will account for 70% of the mobile market. Today's 15-band phones can have up to $12 of Skyworks content in them. But a 30-band phone, which is less than two years away, will probably have over $18 of Skyworks content stuffed in it. Phone complexity is driving sales, not just Apple.
Second, mobile data consumption is exploding. According to Cisco's 2015 VNI Mobile Report, mobile data consumption over the next five years is projected to grow at a 57% consolidated annualized rate. With all that data flowing through phones, Skyworks is well positioned to supply the integrated systems that can keep end users happy. Over the next two years, these changes put Skyworks on a path to over $8 per share in earnings as increasing complexity and mobile data consumption drive sales.
Given these factors, Skyworks could trade back to its 52-week high of $112. I think investors will shake off the fears of the PMC-Sierra deal and they will begin to realize that Skyworks has many different ways to grow independently from Apple.