Skyworks Solutions, Inc. (SWKS), one of the largest suppliers of semiconductors to smartphone manufacturers, has been subject to criticism in the last few years because of its dependency on Apple, Inc. (AAPL).
Back in 2012, Apple accounted for less than 29% of total revenue reported by Skyworks, but in 2019, the contribution had increased to over 50%. Apple has a reputation for using its scale to reach favorable terms with its suppliers, and for this reason, many investors feared Skyworks might come under pressure from Apple, resulting in a decline in operating margins. Proving critics wrong, Skyworks has turned the tables by becoming Apple’s preferred chip supplier and is now playing an integral part in Apple’s success story.
Recent developments paint a very promising picture of what the future holds for Skyworks, and the stock remains undervalued despite reaching new highs following fiscal first-quarter earnings.
There is momentum behind the global smartphone industry
The growth rate for smartphone shipments has declined at a measured pace over the last few years, and experts seemed to agree on the fact that this industry was reaching a mature stage. The virus-induced recession dealt a massive blow on top of these structural developments, and global smartphone shipments dropped sharply in Q1 2020. Since then, however, the industry has bounced back along with the global economic recovery.
The industry received a boost from the launch of 5G-enabled devices in Q4, including the Apple iPhone 12. According to IDC estimates, Apple shipped 90.1 million iPhone devices in Q4, compared to just 73.8 million smartphones in the corresponding quarter in 2019. This stellar growth in shipments helped the company increase its market share of the global smartphone industry to 23.4% from 19.9% in Q4 2019. On cue, Apple reported a record revenue of $111.4 billion for the fiscal first quarter ended December 26, 2020, indicating the strong momentum behind its latest 5G-enabled devices.
Skyworks is well-positioned to report strong growth in earnings
Skyworks Solutions generates approximately 70% of its revenue from the mobile segment and Apple dominates this segment. Therefore, expected growth in global smartphone shipments will create a strong platform for Skyworks to report robust earnings growth.
For the fiscal first quarter ended in December, the company reported record revenue of $1.51 billion, up over 69% year-over-year. This better-than-expected performance helped Skyworks beat analyst estimates by 60%, sending the stock to new highs as investors rewarded the company for its earnings momentum. This, in fact, is the most substantial earnings beat for Skyworks in recent history.
The 5G upgrade supercycle is expected to play out over the next three years, so it’s reasonable to assume that we are still in the very early stages of this macroeconomic development. Apple has already raised its forecasts for smartphone sales in 2021 because of the strong demand for its first-ever 5G device, and this is promising news for Skyworks investors. Factoring these expectations into their earnings models, Wall Street analysts have raised their earnings estimates by double-digits for the next quarter, which is a sign that the company has hit a sweet spot from an earnings perspective.
The earnings momentum will likely lift Skyworks Solutions stock to new highs in 2021, and the average analyst price target of $205.69 suggests 15% upside potential from current levels. What’s more, its Moderate Buy consensus rating breaks down into 13 Buys and 7 Holds. (See Skyworks Solutions stock analysis on TipRanks)
Positive revisions to this price target estimate are in the cards considering the company’s penetration into other high-growth business sectors.
Skyworks is expanding its horizons
The partnership with Apple is lucrative, but Skyworks remains focused on expanding its horizons to mitigate the risk of concentrating on a single large-scale smartphone manufacturer. Over the last few years, the company has successfully entered into partnerships with many other leading smartphone manufacturers including Samsung, Huawei, and Xiaomi. Additionally, all of these companies have grown exponentially as a result of their success in all-important emerging markets such as India. A diversified stream of revenue is important to secure the long-term sustainability of earnings, and Skyworks is moving in the right direction on this front.
On top of this, the company’s expansion into other business segments such as autonomous driving and Artificial Intelligence will be value accretive in the future as data-driven solutions are expected to dominate the world by 2030, leading to strong demand for the semiconductor manufacturing industry.
Takeaway
It is no secret that the 5G upgrade supercycle will help tech giants such as Apple, but the strong momentum behind semiconductor companies that are playing a vital role in this growth story remains underappreciated by the market. Skyworks Solutions, one of the leading smartphone chipmakers in the world, is trading at a forward earnings multiple of 20 in comparison to the sector average of 33.1, suggesting the stock is relatively undervalued. A careful evaluation of company prospects reveals Skyworks is well-positioned to grow along with Apple in the coming years.
Disclosure: The author is long Skyworks Solutions.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
Snap shares fell 7.5% in after-hours trading on Thursday as the social media company outlined the challenges ahead in the first quarter of FY21. Snap stated that it experienced a loss in advertising momentum in the first two weeks of January as many of its brand advertisers put their advertising campaigns on hold due to the events at the US Capitol.
Snap (SNAP) also warned that changes in the iOS privacy policy could further impact the company’s advertising revenues in the first quarter. Currently, app developers like Snap use iOS’s identifier for advertisers (IDFA) – a string of letters and numbers on every iOS device to offer targeted advertising.
However, late last year, Apple (AAPL) announced changes in its privacy policy for its iOS app store that are likely to be implemented in the first quarter of this year. Under the changed policy, app developers like Snap would have to ask for permission to use a user’s IDFA for targeted advertising.
Snap noted that it is unclear what the long-term impact of these changes would be on its revenues. The company expects its revenues in 1Q to be between $720 million to $740 million and its daily active users (DAUs) to grow by 20% year-on-year to 275 million. Adjusted EBITDA could land between -$70 million to -$50 million in 1Q, according to management. (See Snap stock analysis on TipRanks)
The company’s 4Q non- GAAP diluted EPS came in at $0.09, ahead of analysts’ estimates of $0.07. Revenues were up by 62% year-on-year to $911 million, beating analysts’ estimates of $857.4 million. The company’s DAUs in 4Q also increased 22% year-on-year to 265 million.
Snap’s CEO Evan Siegel said, “…we’re proud of the strong results we delivered for our advertising partners this quarter and over the full year. We delivered our first full year of Adjusted EBITDA profitability and, as we look towards the future, we’re excited to build on our investments in augmented reality, mapping, and content to drive our ongoing growth.”
On Feb. 1, Monness Crespi Hardt analyst Brian White reiterated a Hold on the stock. White said, “We believe Snap’s improved operational execution and promising, new innovations, combined with a rebound in digital ad spending, position the company well fundamentally in 2021. That said, the stock’s sharp rise in both 2019 and 2020 have resulted in a less compelling valuation.”
The rest of the Street is cautiously optimistic about the stock with a Moderate Buy consensus rating. That’s based on 19 analysts suggesting a Buy, 3 analysts recommending a Hold, and 2 analysts suggesting a Sell. The average analyst price target of $56.93 implies a 2.4% downside potential to current levels.
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The rumor mill has long suggested Apple (AAPL) is looking to gain a foothold in the rising EV space. Now its ambitions appear to be coming to fruition.
On Wednesday night, CNBC reported that Apple and Hyundai/Kia are inching closer to signing a deal to develop the Apple Car. The company’s planned autonomous electric vehicle is expected to enter production at the Kia assembly plant in West Point, Georgia, in 2024.
For Wedbush analyst Daniel Ives, the news is eye-catching yet not much of a shock.
“We continue to believe it’s a matter of when, not if, Apple enters the EV race and this will add another $30+ per share of TAM to the Apple growth story over the next few years given the golden age of EV transformation on the horizon,” the 5-star analyst noted.
Ives believes the EV market “could ultimately be a trillion-dollar opportunity,” and hails Apple’s “smart strategic move” to enter the space.
Apple’s automotive ambitions go back six years. Its plans for an EV – given the term Project Titan - were put on the backburner for a while but appear to be center stage again.
Whether Apple can really unveil its own standalone car by 2024, is questionable says Ives. The analyst says the tech giant has a 35%-40% probability of success to achieve the feat in such a short time span, given the “Herculean-like auto production capabilities, battery technology ramp, financial model implications, and regulatory hurdles involved in such a game changing initiative.”
Ives says the strategy to partner an established auto maker is the right way to go.
“We believe... that many on the Street would rather see Apple partner on the EV path, than start building its own vehicles/factories given the margin and financial model implications down the road, coupled with the strategic product risk around such a gargantuan endeavor,” the analyst added.
If the Hyundai-Apple rumors are true, then, this could be a “golden partnership for the next decade tapping into this EV opportunity.”
As a result, Ives reiterated an Outperform (i.e Buy) rating on Apple shares, along with a $175 price target. This figure implies 27% upside from current levels. (To watch Ives’ track record, click here)
Most other Street analysts agree. AAPL's Moderate Buy consensus rating is based on 20 Buys, 5 Holds and 2 Sells. At $149.92, the average price target suggests upside of 12% over the next 12 months. (See Apple stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.