EUR 850.00 For Business Accounts Only

Morningstar | Skyworks Remains Fundamentally Undervalued as Management Implements a $2 Billion Buyback Plan

Skyworks reported predictably soft fiscal first-quarter results in line with its prior earnings warning in early January, while the firm's forecast for March quarter was modestly disappointing and the hints for the trajectory of revenue growth in fiscal 2019 were also below our prior expectations. Near-term smartphone weakness, both at Apple and at Android-based phone makers, is to blame, but we still like the firm's secular growth drivers of more advanced RF content going into 4G and (soon) 5G phones, as well as non-smartphones like wireless infrastructure, home gateways and Internet of Things devices, among others. Perhaps the brightest news for Skyworks was the announcement of a $2 billion stock buyback program, which we applaud as we still view the firm's shares as fundamentally undervalued. We will maintain our $105 fair value estimate for narrow-moat Skyworks.

Revenue in the December quarter was $972 million, down 4% sequentially, down 8% year over year and in line with the firm's earnings warning in January. Mobile device revenue was likely down a low teens percentage year over year, due to lower-than-expected demand for Apple's iPhones but also Android-based devices, especially in China, a region that appears to be suffering from trade wars and an economic malaise. The bright spot for Skyworks is that the firm's broad market segment, that is, excludes smartphones still rose at a double-digit pace year-over-year. Despite lower sales levels, adjusted gross margins fell only 20 basis points sequentially to 51.0%.

For the March quarter, Skyworks expects revenue in the range of $800 million-$820 million, which, at the midpoint, would represent a 17% sequential decline during the normally weak period and an 11% decline year over year. Further out, the company foresees normal seasonality through the rest of 2019, meaning flat-to-up sequential revenue growth in June and stronger growth in the second half of 2019 as the next iPhone launch ramps up.

Skyworks remains bullish about its non-smartphone business in fiscal 2019, anticipating double digit year-over-year growth in the next couple of quarters. Unlike many other chipmakers facing demand headwinds due to sluggish automotive or industrial demand, Skyworks has relatively little content in autos and factory automation equipment today. On the other hand, connectivity still very much matters in home gateway devices like routers, as well as wireless infrastructure, where Skyworks appears to be gaining traction in 5G network buildouts with firms like Ericsson, Nokia, Huawei and ZTE (the latter two are still business-as-usual despite geopolitical concerns between the U.S. and China). Although broad market is still the smaller segment within Skyworks and the firm will be tied to Apple iPhone demand (for better or worse) in the years ahead, we still think the company's prospects in non-smartphone devices remain quite bright.

For further insight into the 5G RF landscape, please refer to our October 2018 special report, "Filtering the 5G Radio Frequency Landscape."