What’s in Store for Skyworks Solutions This Year?

Skyworks Solutions (NASDAQ: SWKS) had a tricky task at hand going into its first-quarter fiscal 2018 earnings report because of a weaker-than-expected outlook in the quarter containing March issued by its largest customer, Apple. But the company managed to win over investors and Wall Street alike with a strong performance.

Skyworks reported substantial year-over-year growth in its revenue and earnings. But its guidance was weaker than expected because of a potential slowdown in smartphone sales during the first quarter of 2018. Investors didn't mind the tepid outlook, however, as Skyworks announced a stock repurchase program worth $1 billion.

Skyworks has pledged to return 60% to 75% of its free cash flow to shareholders going forward, up from the prior range of 40% to 50%. Additionally, the company's non-mobile business continues to gain traction, allowing it to mitigate some of the Apple-related weakness.

So it isn't surprising to see why investors didn't mind a slowdown in the company's growth during the first quarter. But will Skyworks' growth get back on track as the year progresses? Let's find out.

The mobile business should improve eventually

Skyworks gets 75% of its revenue from the mobile business. Apple is the dominant buyer of the company's wireless chips, supplying 39% of its total revenue in fiscal 2017 that ended in September last year. So Apple's muted outlook for the current quarter has clearly impacted Skyworks' guidance.

Skyworks' clients in China won't come to its rescue, either, as sales in the country are expected to drop 30% sequentially during the quarter containing March because of seasonality, according to DigiTimes Research. As a result, Skyworks expects just 7% year-over-year growth in revenue this quarter, while analysts were looking for a 10.3% jump.

Wall Street was impressed by the fact that the weak smartphone scenario hasn't had a huge negative impact on Skyworks' current-quarter guidance, thanks to the company's growth in other areas like the Internet of Things. What's more, Skyworks management is looking at a turnaround in the mobile business toward the latter half of the year thanks to new design wins.

According to TrendForce, mobile phone sales in 2018 will rise 5% as compared to last year's 6.5% growth. But Skyworks can make up for this drop in shipments since it claims to have landed some "really powerful design wins" in this space, stating that it is "just a matter of time for those to actually make it into our P&L [income statement]."

Moreover, Skyworks' growing clout with Chinese smartphone makers could be another catalyst. The global use of Chinese smartphones increased 47% year over year to 905 million units in October 2017, according to Newzoo. This year, the installed base of Chinese smartphones is expected to exceed 1 billion units thanks to their aggressive adoption in developing markets such as India.

This will be great for Skyworks because it supplies its chips to flagship devices of leading Chinese smartphone companies like Oppo, Vivo, and Xiaomi. So investors can expect Skyworks' mobile business to get back on track after a muted start to the year. However, the non-mobile business could be a bigger catalyst for the company since Skyworks is pursuing fast-growing opportunities like smart homes.

Making the right moves in the non-mobile business

Skyworks' non-mobile business, which it classifies as broad markets, is currently contributing 25% to its total revenue. This segment has gained impressive traction of late thanks to the company's design wins in the Internet of Things applications like connected cars, smart speakers, and smart lighting.

Skyworks has recently deployed connectivity modules supporting Bluetooth and ZigBee connectivity protocols for connected home alarm systems from Alphabet's Nest, as well as enabling wireless connectivity in Amazon's Alexa devices and Google's Home Max wireless speakers. Additionally, German lighting manufacturer Osram's North American manufacturer Sylvania has selected Skyworks chip designs for use in smart light bulbs for connected homes.

These wins are a clear indication that Skyworks has started cutting its teeth in the smart-home space. This could be a big deal for the company as smart-home revenue is expected to jump to almost $120 billion in 2022 as compared to $51.8 billion in 2016, according to Mordor Intelligence.

Broad markets could thus become a bigger contributor to Skyworks' overall revenue in the long run, and help mitigate any weakness from the smartphone side of the business.

All in all, Skyworks Solutions' latest results demonstrate that the company's slowdown in the current quarter is temporary. The chipmaker is moving into the right areas to take advantage of the growing demand for connectivity chips, securing its long-term growth and making it a good bet considering its valuation.

Skyworks has a trailing P/E ratio of 23.7, lower than the 30.7 industry average. A forward P/E ratio of 13.3 points toward future bottom-line growth, so it is a no-brainer for investors to continue holding the stock in their portfolio, as it can deliver more upside going forward.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, and Skyworks Solutions. The Motley Fool has a disclosure policy.