Here's How Much Skyworks Depends on Apple
Wireless chipmaker Skyworks (NASDAQ: SWKS) generates most of its revenue from sales to the smartphone market. Of the $972 million in revenue that Skyworks reported in its most recent quarter, 73% came from chip sales to the mobile market, while the remaining 27% derived from sales to nonmobile or, as management refers to it, "broad market" applications.
While it seems intuitively clear that a wireless chip company would generate most of its revenue from the smartphone market, what might be less obvious to those new to the industry is that Skyworks' wireless business is hugely dependent on a single customer: Apple (NASDAQ: AAPL).
In its most recent fiscal year, Skyworks reported that a full 47% of its revenue came from sales to Apple. Skyworks explained in its annual filing that Apple uses its chips for "smartphones, tablets, desktop and notebook computers, watches, and other devices." Because Apple's iPhones represent the company's largest market, you can bet that a large portion of that Apple-related revenue comes from iPhone sales.
Let's take a closer look at what this means for Skyworks and its investors.
Still a growth opportunity
Although Apple's iPhone business is currently experiencing some turbulence, Skyworks' strong position within Apple still represents a good long-term growth opportunity. As the company outlined in its most recent investor presentation, Skyworks tends to see wireless-chip dollar content increases in smartphones as those devices are endowed with support for more advanced cellular standards.
Apple regularly equips its latest iPhones with faster wireless subsystems. The iPhone XS and iPhone XS Max (the company's highest-end devices) support gigabit LTE download speeds, which is up from about 600 megabits per second for the previous generation of iPhones. Apple's iPhones this year stand to be upgraded with newer LTE modems with support for 1.6 gigabit-per-second download speeds. (It also appears likely that the iPhone XR -- which had the same cellular capabilities as the prior-generation iPhones -- will get a significant wireless upgrade this year, too.)
The point, though, is that to the extent that Apple keeps upgrading the wireless capabilities of its iPhones, Skyworks will gain from corresponding dollar content increases -- something that should ultimately fuel long-term growth in its wireless business.
Moreover, Skyworks doesn't just sell product to Apple. Mathematically speaking, while Apple certainly makes up the bulk of the company's mobile chip sales, it still sells wireless components to other mobile device makers. The same dynamics of increasingly sophisticated wireless content in those devices apply, too.
Skyworks is looking to apply its technology to areas beyond smartphones, such as the Internet of Things (IoT) and automotive applications. These opportunities are still quite a bit smaller than the smartphone opportunities due to the sheer number of smartphones that get sold each year, but remember that Skyworks' broad market currently represents a sizable chunk of its overall revenue. That percentage could also grow over time, ultimately helping Skyworks to reduce its concentration in the overall smartphone market and, by extension, its reliance on Apple.
As this happens, Skyworks' risk profile should improve. While Skyworks is certainly better off having the revenue from Apple and the overall smartphone market, it's a good idea for the company to diversify its revenue base.
First, going after additional opportunities means that Skyworks' overall revenue and profitability should increase -- something that should be the aim of any company. Second, simply from a risk perspective, it's worthwhile not to have all of one's eggs in a single basket.
The company's overall exposure to the smartphone market means that it's subject to the trends in that market. While Skyworks stands to benefit from the content growth story in smartphones, the overall industry is suffering from unit shipment softness. Analysts with IDC, for example, say that worldwide smartphone shipments are set to decline by 0.8% in 2019, marking the third year in a row of industrywide shipment declines.
Skyworks won't be immune from negative trends in the smartphone market (and if they ultimately reverse and go positive, that will be an extra bonus), but it should be able to mitigate the impact if it increases revenue from faster-growing markets.
Skyworks is heavily dependent on the smartphone market as well as on Apple. That extensive exposure isn't necessarily bad, as Skyworks will continue to reap rewards from dollar content growth in smartphones, but it's still important that the company continue its diversification efforts to accelerate growth and reduce risk. I'll be keeping a close eye on its broad market efforts to see if the diversification of Skywork's business continues to play out.
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Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple and Skyworks Solutions. The Motley Fool has the following options: short January 2020 $155 calls on Apple and long January 2020 $150 calls on Apple. The Motley Fool has a disclosure policy.