Is Skyworks Solutions' 25% Stock Sell-Off Overdone?

Semiconductor manufacturers that specialize in connectivity-enabling chips often cite the billions of devices getting hooked up to the internet every year as a reason for investing in the movement. For some, the hype is real; for others, the optimism has yet to coalesce into returns for investors. The last few years, Skyworks Solutions (NASDAQ: SWKS) has fallen into the latter camp. The stock has swung up and back down again wildly, and as of this writing, the trailing three-year return on the stock is an underwhelming 8%. The last bout of losses comes on the heels of a double whammy of poor news: another soft quarter followed by deterioration in trade negotiations between the U.S. and China.

After reporting second-quarter fiscal 2019 results, Skyworks' stock is down over 25%. And though the company continues to deal with the semiconductor industry slump that began in the summer of 2018, things could be worse. Thus, the recent sell-off looks overdone.

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An elusive rebound

The cyclical chip industry started to take a breather in 2018, so Skyworks' respective 6% and 12% rise in revenue and adjusted earnings during the year was pretty good in relative terms. Things have really started to head south as of late, though. Two-thirds of the company's sales go to the smartphone market, and with phone sales still in decline, Skyworks has had a tougher time lately. Revenue and adjusted earnings fell 11% and 18%, respectively, in the second quarter of the current fiscal year alone.

The U.S.-China trade war isn't helping the situation. Though the vast majority of Skyworks' mobile sales are derived from Apple (NASDAQ: AAPL), the U.S. government's crackdown on businesses selling to China's smartphone and tech giant Huawei could cause some headaches. An increase in tariffs could be a problem as well, since a significant portion of the semiconductor industries' manufacturing process occurs across the Pacific. The upshot is that the White House has offered some reprieve, granting a temporary exemption for some firms selling to Huawei to allow time to make adjustments. Nevertheless, the trade war escalation creates uncertainty, which in turn is a big reason for the recent pullback in Skyworks shares.

5G, connected things, and smartphones

And then there's the guidance management gave for the third quarter. Revenues are expected to fall as much as 9%; adjusted earnings are anticipated to be $1.50 at the midpoint, an 8.5% year-over-year decline.

The consolation is that the numbers would be a sequential increase over the second quarter, and management does continue to maintain that it sees better times ahead during the second half of 2019. Some of that optimism is seasonal demand, as orders for electronics ramp up ahead of the winter holidays, and some of it is Skyworks' anticipation that its 5G networking portfolio will gain momentum as mobile providers begin the long process of building out new infrastructure.

That would be welcome news, as the company's business outside of smartphones continues to gain, but not fast enough to offset losses for smartphones themselves. At least for the time being, though, the worst looks to be in the rearview mirror -- if management's assertion that business will rebound the back half of this year transpires.

Either way, Skyworks' stock looks pretty cheap right now. Trailing 12-month price to free cash flow is 18.9 after the recent pullback, and one-year forward price to earnings is a modest 9.4. Of course, shares are cheap for a reason, as the long-term implications from the trade war make the overall outlook a bit cloudy. Nevertheless, the business warrants a look from any investor at all interested in betting on the connectivity movement -- trade war, tariffs, and smartphone slowdown or not.

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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.