The best choice for Apple’s industry chain, why did Citi add Skyworks to the key watch list?

Highlights of U.S. stocks

After a recent survey of supply chain data, Citibank said that the market’s shipments of Apple’s next-generation iPhone are still higher than expected. Therefore, Citigroup added Apple’s supplier Skyworks Solutions (Nasdaq: SWKS) to the key watch list. The agency believes that Skyworks has upside potential in the second quarter because Apple accounts for about 50% of sales.

At the same time, Citi further stated that investors’ forecasts for Skyworks did not consider the contribution of the acquisition of Silicon Labs’ infrastructure and automotive businesses, which will become a new revenue growth driver this quarter. Citi therefore maintains a neutral rating on Skyworks and a target price of US$182.

The best choice for Apple's industry chain, why did Citi add Skyworks to the key watch list?

【Technology Analysis】

SWKS closed down 1.24% on the previous trading day, and went out of an ascending box in the short-term, and the support level was $182. In the long run, SWKS is still oscillating in the box of 160-200 dollars. On the one hand, investors are evaluating the risk of over-reliance on iPhone revenue. On the other hand, 5G and the Internet of Things are becoming SWKS long-term performance catalysts.

The following is the specific content of the report

Skyworks Solutions (SWKS) is an American semiconductor company founded in 2002, headquartered in Irvine, California. Skyworks does not compete with well-known companies in the CPU and GPU industries, but instead focuses on manufacturing semiconductors for RF products and mobile communications.

Skyworks stock has seen some volatility this year, which is consistent with most growth industries, especially the chip industry that is dealing with a global semiconductor shortage, but the company is good at finding ways to provide supporting services and products in lucrative high-growth industries. And at the forefront of ubiquitous connectivity, it is worth looking forward to in the long run.

Second quarter earnings report

Skyworks’ revenue in the second quarter was $1.17 billion, an increase of 53% over the second quarter of last year. This strong quarter-on-year growth shows that after a few years of slow growth in mobile phone sales, 5G has just begun to have a positive impact on mobile.

In addition, between the two catalysts of 5G and the pandemic, Skyworks’ revenues in areas other than the “broad market” or mobile phones have really started to take off. Skyworks’ extensive market portfolio created a record revenue of $385 million, an increase of 67% over the same period last year.

For many reasons, Skyworks attaches great importance to expanding a wide range of market segments. The two most important reasons are that the first is to diversify the company’s revenue. Apple’s current customer concentration is very high (accounting for 56% of revenue in fiscal year 2020). The second reason is that the profit margin of the broad market segment should be more than The mobile segment is much better.

In the earnings conference call, Wells Fargo analyst Gary Mobley questioned the company when Apple accounted for too much of the Skyworks revenue portfolio, but the quarterly gross margin increase was low.

Skyworks CEO Liam Griffin replied that the supply chain environment of the semiconductor industry is full of challenges, so it needs to absorb some increased input costs, but despite this, Skyworks’s gross profit margin has increased by 60 basis points year-on-year.

Compared with some other companies in the semiconductor industry, Skyworks seems to have fewer supply chain problems and fewer capacity constraints. The reason is that Skyworks has made careful manufacturing capacity investments in many different areas in the past few years to prepare for 5G.

Despite the tight supply environment, we have done very well in meeting this demand. We control this through our own factories, and we have been proactively investing a lot of production capacity, because we know that as we enter 5G, a strong cycle of 50% year-on-year growth is coming to us, so we “have been executing well, We did buy something from a third party, which was a bit nervous. But considering the size and scale of Skyworks and the strong team we have, we performed very well there.

Source: Skyworks CEO Liam Griffin-Q2 Earnings Conference Call Record

Skyworks operates its own fab, has its own assembly and test facilities, and the company has more control over its own destiny, which is the opposite of fabless manufacturing companies that use the foundry model.

However, some people believe that the slower profit margin expansion is not just the input cost of Skyworks, but also the increasingly fierce competition from Qorvo (NASDAQ: QRVO) and Broadcom (NASDAQ: AVGO), which leads to slightly lower sales revenue growth.

Skyworks’ non-GAAP gross profit for the second fiscal quarter was $595 million, and its non-GAAP gross profit margin was 50.8%, an increase of 60 basis points year-on-year. GAAP gross profit was $578, and GAAP gross profit margin was 49.4%. Skyworks’ long-term gross margin target is 53%, and if all goes well, it will be achieved in the next few years.

Skyworks also generated $440 million in operating income and an operating profit margin of 37.6%, an increase of 510 basis points from the second quarter of last year. The long-term goal of Skyworks management is an adjusted operating profit margin of 40%.

During the earnings call, Raymond James analyst Chris Caso asked Skyworks’ long-term view of operating expenses. At present, the growth rate of operating expenses is much lower than the growth rate of revenue. Chris Caso wants to know whether Skyworks will eventually need to invest at a higher speed to promote sufficient future growth.

The answer given by Skyworks management is that, in the long run, the company hopes to keep its total operating expenses at about 13% of revenue. The company believes that the 13% range is sufficient to fund all future growth planned by Skyworks.

Cash flow from operations for the second fiscal quarter was $616 million, setting a quarterly record for Skyworks. Subtracting $141 million in capital expenditure from operating cash flow generated a record free cash flow of $475 million. This translates into a strong free cash flow profit margin of 41%, a figure that reflects the extent to which the company converts sales into cash.

Earnings per share were US$2.37, an increase of 77% year-on-year, demonstrating strong operating leverage. This EPS represents a new record for Skyworks in the second quarter.

The 5G market offers compelling growth opportunities

Skyworks is in a good position to take advantage of the recently deployed 5G network globally. The company estimates that the implementation of 5G will nearly double its total potential market and provide them with a portfolio of solutions worth close to US$1 trillion.

By focusing on smartphones, Skyworks has opened up a huge network of connected devices and, driven by long-term global trends such as the Internet of Things, mobile connectivity, automobiles, and emerging technologies, has consolidated their position in many high-value industries in the future.

The best choice for Apple's industry chain, why did Citi add Skyworks to the key watch list?

Skyworks has a set of diversified business solutions and a matching supply chain. It operates in multiple countries and covers different parts of its business. To a large extent, this is still a positive whole in today’s political climate.

The best choice for Apple's industry chain, why did Citi add Skyworks to the key watch list?

Skyworks has huge growth potential in the long-term. The increase in smart car adoption alone can greatly increase Skyworks’ TAM, especially because it has already cooperated with Tesla (NASDAQ: TSLA), General Motors (New York Stock Exchange). Code: GM), Volkswagen (OTCPK: VWAGY) and Toyota (NYSE code) and other major automakers have established partnerships. : TM)

Skyworks also recently acquired Silicon Laboratories for $2.5 billion, which greatly strengthened its automotive semiconductor business. Skyworks’ revenue growth in the second quarter has demonstrated the impact of the 5G revolution on the company. Revenue figures have increased from US$766 million in the second quarter of 2020 to US$1.17 billion in the second quarter of 2021.

Skyworks stated that it has a long-term goal of 53% gross profit margin and 30% free cash flow profit margin, of which 60%-75% will be returned to shareholders in the form of dividends or stock buybacks.

The best choice for Apple's industry chain, why did Citi add Skyworks to the key watch list?

In the past, one of the more persistent criticisms of Skyworks was that its revenue relied heavily on its partnership with Apple (AAPL). Although the criticism is unjustified, because most of the world companies are willing to rely on Apple to get the revenue, but Skyworks profound but diverse customer base to soften their dependence by building impressive, which in recent acquisitions to get the It helps a lot.

The best choice for Apple's industry chain, why did Citi add Skyworks to the key watch list?

As mentioned earlier, Skyworks Solutions adds value by providing key technology solutions to customers in high-value markets. The emergence of electric vehicles and smart cars will demand new technologies in the automotive manufacturing industry, and we expect this trend to continue.

We also hope that Skyworks will continue to position itself to expand profitable relationships in this area. As far as technology integration (and 5G) is concerned, it is currently undergoing a paradigm shift, and it is no coincidence that Skyworks finds its position here. This is what they are good at, developing the ability to match the surge in demand for new technologies in the market. This should be very attractive to potential investors.

The best choice for Apple's industry chain, why did Citi add Skyworks to the key watch list?

In the long run, Skyworks is a major player in the semiconductor field, but certainly not an industry leader. This honor belongs to Nvidia (NVDA). But as we discussed before, Skyworks excels at providing value to key players in high-growth industries. It has partnered with major players in their respective markets and will benefit from natural market growth or changing needs as its customers track long-term trends in their respective industries.

Main investment risks

It is currently difficult to find a real criticism of Skyworks. The company is going through an excellent cycle. It is encouraging to see Skyworks expand into other industries, because until recently, the company was one of the most concentrated companies in the industry.

One long-term metric that Skyworks monitors is the percentage of revenue from Apple. Ideally, Skyworks investors would like to see the company diversify to manage this percentage to decline over time. I hope to see a mixed shift from Apple to the broader market until Apple’s revenue continues to drop below 10% in about five to seven years.

In fiscal year 2020, smartphone leader Apple accounted for 56% of Skyworks’ revenue. As Apple increases iPhone production by 20%, Skyworks may see further growth in these concentrated revenues. It’s hard to complain that Apple is your best customer, but we only need to ask Intel (INTC) investors when Apple decides to start producing its own chips to see the main risks here.

Skyworks still attaches great importance to the success of the iPhone, which is why when any news about iPhone demand or sales is released, the stock usually changes in sync with Apple. Skyworks and Apple have a high degree of customer concentration (56% of revenue in fiscal year 2020, but dropped to 50% of total revenue in March). If Apple decides to reduce its business with Skyworks, Skyworks’ stock price may be severely hit.

I believe Skyworks will diversify and stay away from Apple in the next 5 years or so. Throughout the 5G cycle, Apple should remain a strong customer of Skyworks, because Skyworks is the industry leader in the field of RF equipment, and Apple has few other options. After all, only Skyworks can obtain RF equipment of the same quality in the same quantity provided.

However, Apple is actively seeking to become a participant in 6G. When the 6G standard emerges, Apple may have expertise in manufacturing RF equipment. 6G is expected to be put into commercial use in 2030. I think Skyworks is very aware that Apple might one day make RF equipment for its own products. I suspect Skyworks acquisition of Silicon Laboratories infrastructure and automotive part transfer one machine they want to dramatically accelerate business diversification away from Apple.

Skyworks also has the risk of being acquired, which in this case may have a big negative impact. Compared with its competitors, Skyworks is also a smaller company, so if there is a suitable offer, it will become a candidate for acquisition.

Industry giants such as Broadcom (AVGO) and Qualcomm (QCOM) have the scale and capital to integrate with small companies in the industry, and Skyworks is indeed located in small and medium-sized market capitalization groups, which makes it attractive to large fish. If Skyworks’s next decade looks like the past 10 years, such an acquisition would be unfortunate for shareholders.

in conclusion

Skyworks operates in a market that is consolidating and benefits large players who have the rare ability to manufacture integrated devices for 5G applications on a large scale.

One of the main arguments for investing in Skyworks is that compared with 4G-based RF equipment, there are currently fewer companies that can maintain relevance in 5G-based RF equipment, and due to less competition, large-scale participation in the RF market like Skyworks The operator should gain additional pricing power for revenue and better long-term profit potential.

Most of the biggest opportunities for Skyworks in the 5G market should come into play within Skyworks’ three to five years. Skyworks is suitable for investors who have a time span of three to five years and can wait for the story to fully develop.

Short-term investors should avoid investing in Skyworks at this time, as this may cause disappointment. The 5G revolution may be suspended in 2022, and investors who are excited about the “hype” of 5G may be upset about the slowdown in 5G companies such as Skyworks, because the performance in 2022 will contrast with the very strong performance in 2021.

Currently, Skyworks has a P/E ratio of 26 and a reasonable P/S ratio of 7. It is not an ordinary high-tech company. In fact, it is already a profitable, positive free cash flow company with an original balance sheet. Skyworks has a lot to pay attention to, especially now that it is involved in different industries such as automobiles. It is estimated that 73% of new cars will have cellular connectivity by 2024. I rate the stock as “Buy.”

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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