So, it is no surprise that the stock, which has been under pressure so far this year, is trading up around 7% as of this writing. The latest earnings results confirm the strength of the company’s business and those who have been critical of the company as just an Apple Inc. (NASDAQ:AAPL) supplier should now take note.
Strong as ever
Skyworks is landing more contracts and is well-positioned to benefit from the mobile boom, given the fact that its chips enable connectivity in mobile devices and other applications. Smartphone growth in China and some of the choicest clients in the industry make Skyworks a good bet to ride the growth in connectivity, be it mobile devices or other connectivity applications.
The company is pushing for diversification across various markets, is highly-focused on innovation, and has a diversified customer base. Considering these factors, it doesn’t come as a surprise that Skyworks Solutions Inc (NASDAQ:SWKS)’ revenue came in better than analyst estimates. It posted revenue of $436 million, up 12% from last year and marginally ahead of consensus expectations. But, more importantly, it expects revenue of $475 million for the ongoing quarter, which is again ahead of expectations.
As far as earnings are concerned, Skyworks Solutions Inc (NASDAQ:SWKS) earned $0.54 a share on an adjusted basis, a penny ahead of estimates, and its expectation of $0.62 a share for the ongoing quarter is again better than the Street estimate of $0.60. To prop up earnings further, Skyworks’ management will be buying back $250 million worth of shares over the next couple of years, which is a prudent move as the company has ample cash and no debt, and at the same time, is investing in research and development as well.
Going forward, one can expect even better performance from the company. As mentioned earlier, Skyworks is looking to expand into more markets and its product innovation is driving margins. Its investments in more efficient and better performing analog solutions has led to margin expansion, as evidenced by a 200-basis-point improvement in gross margin from last year to 44% in the quarter.
So, as these high margin products gain more traction, Skyworks Solutions Inc (NASDAQ:SWKS) should see further gross margin expansion, and the same is expected to happen in the current quarter where it is expecting gross margin of 44.25%.
Big, big opportunities
As far as opportunity to sell its products is concerned, there is no dearth of it. The booming market for smartphones in China, where users are now moving to 3G devices, is one big opportunity for Skyworks. So, Skyworks will find more takers for its higher-margin 3G chips as a result of Chinese smartphone growth. In addition, the company is of the opinion is that the growing complexity of connectivity solutions will lead to a bump in its addressable market.
So, once the migration to 4G devices in China begins, Skyworks will have an even bigger playing field at its disposal. Presently, telecom major China Mobile Ltd. (ADR) (NYSE:CHL) is the one looking to roll out LTE in the nation. It began testing its TD-LTE network earlier this year in Guangzhou and Shenzen and is expected to officially roll out its network for public use next month. Once China Mobile Ltd. (ADR) (NYSE:CHL)’s LTE network is deployed, we should see more devices supporting the technology and Skyworks Solutions Inc (NASDAQ:SWKS)’ addressable market should increase further; and probably at higher margins.
Another good reason to have Skyworks in your portfolio is its strong relationship with both Samsung and Apple Inc. (NASDAQ:AAPL). The company supplied a lot of content for the Galaxy S4 and looking forward, its relationship with Apple should be another growth driver. Skyworks supplies chips for the iPhone, the iPad, and also the iPad mini.
So, given the strong and pretty old relationship between the two, it won’t be unworldly to expect that Skyworks might find a bigger market for its chips if Apple Inc. (NASDAQ:AAPL) introduces a cheaper iPhone or a retina iPad mini. Recent reports suggest that a cheaper version of the iPhone might well be a possibility as Apple looks to provide a fillip to its slowing iPhone sales by tapping emerging markets.
Also, given the stupendous success of the iPad mini, and a retina version reported to be on the way, Skyworks can expect more fireworks courtesy its Apple account. But, as I said, Skyworks Solutions Inc (NASDAQ:SWKS) is looking to diversify its markets, and expects to benefit from diverse applications such as the Internet of Things, including connected homes, connectivity in automotive applications, lighting etc. It projects 50 billion connected devices by 2020 and so, the opportunity is indeed huge.
The company has made some moves, such as landing design wins for car infotainment systems and other applications. Hence, with the expected growth in connected devices going forward, the demand for Skyworks’ modules and radio frequency solutions should improve at a rapid pace.
The bottom line
And what does one need to pay for this growth? Well, just 9.6 times forward earnings, which is considerably below the trailing figure of 19 times. Moreover, a PEG ratio of just 0.63 suggests that the company is expected to grow at a good rate in the future. So, all in all, Skyworks Solutions Inc (NASDAQ:SWKS) is still a decent investment as it has got good growth prospects and a decent valuation.
The article This Stock Is Now Headed for the Sky, Don’t Miss It originally appeared on Fool.com and is written by Harsh Chauhan.
Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and China Mobile. Harsh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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