The coming Apple (AAPL - Get Report) iPhone 7 could also push Qorvo (QRVO - Get Report) higher, I wrote Wednesday. With 80% of its revenue from mobile telephony, Skyworks Solutions (SWKS - Get Report) could also benefit.
Shares of Skyworks Solutions have been churning around after its failed bid for PMC Sierra (PMCS) . Many investors feel the company needs to diversify away from its dependence on the mobile telecom market because its radio frequency filters --which are a key component of the mobile phone market -- are quickly becoming commodity products. Some handset makers are rumored to be "dual sourcing" RF filters, and Skyworks' competitive position is slipping.
Meanwhile Qorvo's bulk wave filters can address the needs of the high-end carrier market and have yet to be disrupted.
These tiny filters allow engineers to select the right radio frequencies (or filter out the wrong frequencies) and are a critical component in mobile communications. In a mobile handset, the filter and various components that make the filters work cost between $6 and $8.
Multiplied by millions of phones, the RF filter business is a very attractive business.
But what if Skyworks' filters become commodity products and the company lacks enough high-end business from the telecom carriers?
Without a new iPhone launch, revenue at Skyworks is expected to grow just 0.7% in fiscal 2016. That's disappointing, especially compared to last year's 42% increase. Apple is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio.
If we get an iPhone 7 in September, Skyworks will probably be able to grow revenue in the mid teens (15% to 17%) by fiscal 2017. The pickup in sales will drive operating leverage. Gross margins would go from 48.2% in 2015 to over 52% in 2017. Likewise, operating margins would jump 270 basis points to 37% to 38%. With that kind of operating leverage, earnings per share could go from $5.25 to over $6.30. The slightest jump in sales drives a dramatic jump in earnings.
Apple is estimated to provide 35% of Skyworks' revenue.
That's why it's beneficial to get into fabless semiconductor shares during a trough. After a lackluster 2016, the RF industry could grow between 8% and 12%, which would be sufficient to drive Skyworks shares higher. As a leading semiconductor maker in the wireless industry, Skyworks will be a beneficiary of a September iPhone 7 launch.