Skyworks Solutions: Concern Is Softer Guidance – Initiating With Hold (SWKS)

Investment Thesis

Skyworks Solutions, Inc. (NASDAQ:SWKS), a wireless semi-provider of “RF and complete semi-system solutions for mobile communication applications,” announced earnings for its second quarter of FY2024 earlier this week. I wasn’t too optimistic ahead of earnings, and am still not after guidance. I initiate Skyworks with a Hold; I think the company has more downside risk because of its exposure to mobile sales as the smartphone end demand sags.

Skyworks, in my opinion, is a crucial semi-player providing “front-end modules, radio frequency or RF subsystems, and system solutions to the wireless handset and infrastructure customers.” The company’s position with Apple (AAPL) as its largest customer also scores its importance in the broader semi industry; other Skyworks customers include Amazon, Cisco, Foxconn (again, Apple), and Google, to name a few.

In my opinion, Skyworks’ stock performance reflects the lack of a real smartphone recovery, relatively in line with the S&P 500 (SP500) over the past six months, as shown below.

Even if we take a closer look at the stock’s three-month chart against the S&P 500 (SP500), a similar rate of underperformance appears, with Skyworks stock up ~2% versus the S&P 500 up 4%, as shown below. I don’t see Skyworks outperforming the S&P 500 over the next quarter, as I don’t see any uptick in demand for its end-market exposure in mobile and broadband that would drive top-line growth. In my opinion, Skyworks’ results reflected weak financial performance as its mobile business is expected to be down quarter-over-quarter in the June quarter, “below normal seasonal patterns, as excess inventory clears,” according to CFO Kris Sennesael’s statements on the call. The company’s expectation is for double-digit mobile sales to drop sequentially by 20-25%.

Skyworks’ Value Proposition

Skyworks’ business relies heavily on mobile sales, exposing the company to end demand levels for Apple and the Android market. In Skyworks’ December quarter, management reported that sales were down around 1.4% quarter-over-quarter, sitting in line with Street expectations at $1.20 billion. In the March quarter, Skyworks reported sales down 13% quarter-over-quarter to $1.05 billion, the same as consensus expectations.

Mobile sales represented $850 million of that $1,201.5 million at around ~71% of total sales in the December quarter and $646 million, representing a massive 19% quarter-over-quarter decline. The company’s other important business segment is its broad-market sales, which came in at $348 million in 4Q23, declining 18% quarter-over-quarter, and saw a slight sequential rebound this quarter, up 1% to $352 million.

In my opinion, Skyworks’ board market is better positioned now to see a slight recovery as the inventory correction finishes, but it is unlikely to see any true recovery because of a lack of momentum. Some investors expect the broad market sales to help ease the blow of mobile weakness in the second half of the year. I think it is a possibility, but I don’t believe broad market sales can drive significant outperformance for top-line growth. The smartphone market isn’t estimated to grow beyond low single-digit percentages Y/Y in 2024, and I don’t think growth recovery in broad markets can offset that soft outlook.

Why Do I Care About Apple?

Sales to Skyworks’ largest customer, Apple, also dropped a notable 19% quarter-over-quarter and 4% year-over-year to $711 million, accounting for 68% of total sales. Last quarter, sales to Apple increased by 6% quarter-over-quarter and dropped 3% year-over-year to $877 million, at 73% of total sales. To put this into perspective, in FY2018, sales to Apple made up 47%, in FY2017 29%, and in FY2016 40%. The company’s sales are tied to Apple; this is reflected in end demand from Apple, serving as a positive for Skyworks sales. Yet, I think investors should pay attention to the lower percentage of Apple sales out of total sales this quarter as a signifier of the end demand weakness for smartphones.

Apple and Skyworks’ connection also is reflected in their stock price movements; the graph below shows Apple’s stock performance against Skyworks and the S&P 500 year-to-date; there’s a clear correlation in my opinion.

I think we can use Apple as a gauge to better predict the sales of semi-companies like Skyworks that fit into Apple’s supply chain. Wall Street is watching Apple closely, particularly its iPhone sales, particularly after Skyworks’ results this quarter. It is not too optimistic about iPhone sales this quarter or about Apple’s China business due to the heightened competition. I think the Street sentiment should also be extended to Skyworks. Skyworks reported ahead of Apple, but I think it provides a good indicator of the demand environment at the moment.

Attractive Valuation

Skyworks’ valuation is actually a plus for the company, based on a relative valuation methodology. The stock is relatively inexpensive. I still don’t think its valuation is attractive enough to justify buying the stock in such a bad backdrop for one of its core customers. Skyworks EV/Sales ratio for CY2024 is 3.7 relatively cheaper than its peer group average ratio of 7.34. Skyworks’ Price/Earnings ratio for CY2024 is also lower than the peer group average ratio at 14.9 versus 24.86, according to data from Refinitiv shown in the table below. I think the stock would be more holistically attractive in terms of the risk-reward profile once we see any catalyst for smartphone demand.

What Could Go Wrong?

In my opinion, the risk factor to my bearish sentiment is that Apple may revise iPhone production levels, and we may have better-than-expected smartphone total addressable market, or TAM, growth, which would be positive for Skyworks.

In my opinion, Skyworks’ concentration of sales with Apple is a blessing and a curse; at times like this, obviously, it doesn’t work out in Skyworks’ favor, but in the big picture perspective, it makes Skyworks easier to read, and also easier to capture alpha through. I think what could go wrong from my expectations for the stock would be Apple’s outlook improving compared to already low expectations, which would mean now is the bottom and would make this stock a buy. I’m not too worried about a material rebound for iPhones because my research from smartphone growth estimates for 2024 all confirm a soft-demand environment.

So, while expectations are low, I don’t think they’re low enough yet to reflect the continued demand weakness. I think we’ll see one more in-line outlook before the bottom is hit. I would, however, advise longer-term investors to begin watching the stock on the pullback and slowly adding in the downtrend.

What’s Next

While a top and bottom beat moves stocks up or down, we operate in a forward-looking industry, so many investors’ attention is placed on management’s outlook. Skyworks’ management is guiding sales to drop even higher, double-digit percentage quarter-over-quarter by 16%, to $900 million, after an already steep sequential sales decline this quarter. Management’s guidance trails expectations massively, which are set at $1.02 billion.

In my opinion, the stock sell-off after the results, down 14% in pre-market, mainly because of guidance. I think the inventory correction may be over, but the smartphone slump is not and won’t be for at least another quarter as far as Skyworks’ is concerned. Again, I emphasize that I do believe long-term investors should add on the post-earning pullback we’re seeing.

The reason I don’t have a Buy rating on Skyworks Solutions, Inc. stock yet is because I still don’t see near-term outperformance, but the long end of the weakness is already factored into the stock and outlook, in my opinion. I’ll upgrade the stock once I see signs of a catalyst for smartphone demand, which I estimate will be some time ahead of the October quarter.