Where Will Skyworks Solutions Be in 5 Years?

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The past year has not been kind to Skyworks Solutions (NASDAQ: SWKS) shareholders, as the stock price of the analog semiconductor maker is down almost 20%. Since Skyworks sells most of its products to smartphone makers, its difficulties are easily explained. Smartphone sales have been relatively flat for years, with even Apple (NASDAQ: AAPL) struggling to grow its iconic iPhone sales.

When Skyworks Solutions released its quarterly earnings report earlier this month, the results reflected these headwinds. The company's net revenue shrunk to $972 million, about an 8% decrease, year over year, and adjusted earnings per share (EPS) came in at $1.83, an 8.5% decrease, year over year. Skyworks' guidance for its upcoming quarter wasn't much better, as it expects both revenue and EPS to come in at significant discounts to 2018's second quarter.

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When evaluating companies, it often pays to expand your time horizon beyond the next quarter's report. With Skyworks Solutions, investors might see that even though the near-term future looks bleak, the company's long-term prospects look as bright as ever. Let's try to envision where Skyworks might be in five years.

The coming of 5G

One of the best reasons to be bullish on Skyworks is the fast-approaching rollout of 5G wireless networks. 5G wireless will be significantly faster than today's 4G LTE mobile networks, allowing users to engage with applications that require huge amounts of data -- think virtual reality and high-resolution video downloads -- across mobile networks. For Skyworks Solutions, this is a big deal, as it makes the analog chips and filters that enable devices to connect to wireless networks. In the company's most recent conference call, CEO Liam Griffin called the coming of 5G "a tremendous catalyst," saying:

While Griffin calls out several positives that 5G will bring for Skyworks, they can basically be broken down into two broad categories: More connected devices that will need Skyworks' products and greater dollar-content of the company's materials in each smartphone.

More Skyworks in each phone

With each successive generation of wireless networks, from 3G to 4G to 5G, the number of chips, filters, and bands needed for a phone's connectivity grows. Yet the physical forms of these components need to stay virtually the same -- after all, the size and shape of the phone itself doesn't change.

Consider that in 4G phones Skyworks was required to supply each handset with 40 filters, 15 bands, and 10 switch throws. In 5G phones, these requirements will increase considerably, with each device needing 70 filters, 30 bands, and 30 switch throws. It doesn't take a communications engineer to realize that this is a significant progression in both quantity and complexity.

Griffin these new, more complex, requirements offer a huge opportunity for Skyworks and a select few competitors who are able to clear these hurdles. "[I]t's necessary that new technologies are brought into that same physical form factor, that same handset, new technologies, new spectrum, new frequencies, more filtering, the ability to coexist with different devices brings in a tremendous amount of complexity and challenge and creates a unique opportunity for Skyworks and the top-tier players in our space to win," he explained.

Higher revenue

This increase in materials in each phone, of course, comes with greater compensation. With each successive wireless network generation, Skyworks has been paid for the greater quantity of components it supplies. In 3G phones, Skyworks was compensated an average of $8 for each device it outfitted, and with 4G, that amount more than doubled to $18. In 5G, management is projecting they will make an average of $25 per phone -- a 40% increase in revenue generated per phone. Since mobile phones accounted for 73% of Skyworks' sales in its 2019 first quarter, that represents a huge jump in the company's top line.

Final thoughts

In five years, 5G wireless networks will likely service the majority of the U.S. and the developed world and every major manufacturer of smartphones will want smartphones capable of utilizing this technology. Few companies seem to be able to deliver products that match the complexity and intricacy these systems require, leaving Skyworks as a very select beneficiary of this trend. Designing these systems often requires years of preparation and a "lot of collaborative strategic dialogue" between Skyworks and its customers, making it extremely unlikely a disruptive upstart will emerge to take Skyworks' place in the smartphone ecosystem. This gives Skyworks what should be a sustainable competitive advantage.

While the company faces near-term headwinds and struggles, a longer time horizon shows that the future remains bright for Skyworks Solutions and its investors. While the stock price has significantly lagged the S&P 500's returns over the past year, I suspect that in five years' time, Skyworks investors will enjoy significant outperformance.

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Matthew Cochrane owns shares of 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.