China Tariffs and Huawei Restrictions Mean Tough Going for Skyworks Solutions

Connectivity chip maker Skyworks Solutions (NASDAQ: SWKS) can't buy a break. The company has been dealing with a global slowdown in smartphone sales the past couple of years, chief among them a cool-off from key business partner Apple (NASDAQ: AAPL). Skyworks has an extensive portfolio of products for applications outside the phone market, but it's been slow going replacing Apple as the primary source of income. The latest blow that comes from the U.S.-China trade spat doesn't help.

Say no way to Huawei

Since a significant portion of the manufacturing process takes place in China, semiconductor companies have been affected by the recent escalation in tariffs between the U.S. and its trade partner to the east. So far, it's been less about an impact to top-line growth and more about a slight hit to profitability for hardware makers.

That changed, though, when the Trump administration levied an executive order banning U.S. companies from doing business with Huawei. The Chinese tech giant is one of the world's largest smartphone makers and also a leader in telecommunications network equipment. While Skyworks' biggest partner is Apple -- which made up nearly half of its revenue last year -- Huawei is a significant partner as well. About 12% of Skyworks' sales went to Huawei, most of which was connectivity equipment for the telecom industry. With the 5G mobile network race on and China quickly developing its own ultra-fast mobile internet, the trade restriction on Huawei eliminates not only current sales but also a source of growth for Skyworks.

The bottom-line impact

Skyworks' management provided an update, proving that the Huawei crackdown is posing some real challenges for American tech businesses. The updated outlook is for the third quarter of its 2020 fiscal year, the three months ended June 28.

Sure enough, the elimination of Huawei from the equation will have a significant impact, especially on the bottom line. It aggravates the situation for Skyworks, which was already in the midst of contraction because of the smartphone market cool-down. Through the first six months of the current fiscal year, revenue and adjusted earnings were down 10% and 9%, respectively. It now looks as if a promised rebound late in the year is a long shot.

Two ways to look at the situation

Management said it hadn't expected to see Huawei on the Trump administration's black list, which explains the downgraded guidance. Nevertheless, the stock has struggled since the trade dispute escalated. Shares are down 25% over the last 12-month stretch as of this writing, and off about 18% from its 2019 calendar year high-water mark. There's no saying when the restriction will be lifted, and Skyworks' near-term outlook is even cloudier than it was before the loss of sales. Thus, the stock pullback is warranted.

On the other hand, though, this chipmaker still offers a key component for the digital age. Smartphone growth is likely to be subdued at best from here on out, but Skyworks still has a broad portfolio of product for 5G and telecom networks, wearables, smart home devices, and industrial equipment. A rebound in business could be right around the corner, and after the stock's tumble the company trades at a mere 11 times forward earnings.

The most cautious and risk-averse of investors may wish to steer clear of the company until after the next quarterly report and some comments from the C-suite on the situation. At the very least, though, Skyworks Solutions is worth keeping an eye on.

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Nicholas Rossolillo and his clients own shares of Apple and Skyworks Solutions. The Motley Fool owns shares of and recommends Apple and Skyworks Solutions. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.