Bet on iPhone 5G with 2 Cheap Chipmakers

Jon Markman

5G iPhones are finally here, but investors should skip Apple ((AAPL) -Get Report) and focus on Skyworks Solutions ((SWKS) -Get Report) and Qorvo ((QRVO) -Get Report), the component suppliers that make the new devices speedier.

Apple, Tuesday showed off four redesigned iPhones, all supporting 5G, a wireless standard offering internet connection speeds up to 100x faster than older phones.

The devices are the start of something big, for Skyworks and Qorvo. Let me explain.

In many ways Apple is late to the 5G party. Samsung and Huawei, its major competitors in the high end smartphone market, rolled out fifth generation wireless technology last year. Even Motorola, LG and Google have been able to trot out competent 5G devices to the midrange marketplace.

All of these companies benefitted from better relationships with Qualcomm ((QCOM) -Get Report), the world’s leading designer of 5G radios for mobile devices.

Until last year the San Diego, Calif-based company and Apple were mired in a protracted legal dispute over royalty payments. Basically, Apple managers felt Qualcomm was charging too much. Settling the legal fracas pushed up the 5G iPhone timeline.

All of the new handsets revealed Tuesday will get 5G. There are two distinct variants of fifth generation wireless technology. In theory, high frequency Millimeter Wave devices can achieve wireless connection speeds up to 5 gigabit per second, or 100x faster than 4G. The problem is these networks are not widely available yet because they require more base stations.

The other category, sub-6GHz 5G, is widely available but it’s also much slower than mmWave. For example, Sub-6 connection speeds in suburban Atlanta currently average about 0.2 Gbps.

That’s not the lightening fast speeds 5G that cheerleaders have been promising, but it is still 5x faster the average 4G speed, with much lower latency.

This change could not have come at a better time for Apple. The Cupertino, Calif.-based company has struggled to grow iPhone sales since 2015. Buyers mostly balked at marginally better cameras and cosmetic changes like new colors. The lengthening of the iPhone upgrade cycle has been the single biggest hurdle for Apple sales managers.

Adding 5G wireless connectivity is going to be a major upgrade for most new iPhone buyers.

Skyworks Solutions makes custom semiconductors for the radio frequency systems used by handset makers and wireless providers. Its amplifiers, switches and other components work with 5G radios to deliver better signals, routing and network capacity.

The company, in 2019 won a slew of new contracts from Samsung, LG, Huawei and other Chinese firms as they began rolling out new 5G devices. Sales to telco equipment firms also began ramping up, especially in China, a market serving 780 million smartphone subscribers.

Skyworks managers understand 5G is a big development. They are quickly rolling out new products for the automotive and the internet of things market. However, at 51% of 2019 sales, Apple remains by far the firm’s biggest customer.

Qorvo gets 33% of its sales from Cupertino. Like Skyworks, the company makes custom silicon modules for handset and telco equipment companies trying to make the most of 5G connectivity.

During a conference call with analysts in June, Robert Bruggeworth, chief executive officer, said wireless providers are racing to build out their 5G networks. He noted that global base station deployments are expected to grow from 750,000 units in 2020, to over 1 million locations in 2021. He also said the company had a number of big Sub-6 design wins, leading to record sales for its networking gear.

Meanwhile high margin 5G component sales to handset makers has been offsetting sluggish unit volume growth worldwide. Presently Qorvo 5G modules pull in $5 - $7 per device.

These sentiments were echoed in July by Liam Griffin, chief executive at Skyworks. During the third quarter earnings conference call, he reported that the company achieved 31.3% operating margins on the strength of accelerating demand across all geographies or its expensive 5G silicon. In China, Griffin said 60% of all devices sold during June were 5G handsets.

Apple is an important customer for both Skyworks and Qorvo. Its iconic iPhones often set the standard for both design and technology thresholds. As Apple handsets finally cross the line to 5G, it means new devices from every manufacturer will have to deliver the same going forward. It also means faster base station deployment.

Investors should focus on the companies that directly benefit from that advance.

Skyworks and Qorvo trade at 22x and 18x forward earnings, respectively. Their shares are inexpensive given the coming 5G wave.

Buy shares into any near term weakness. 

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