EUR 850.00 For Business Accounts Only

Morningstar | Skyworks Remains Undervalued Despite Near-Term Forecast Cut Due to Huawei; Maintain $105 FVE

We will maintain our $105 fair value estimate for narrow-moat Skyworks Solutions as the firm, perhaps unsurprisingly, reduced its outlook for the June quarter due to the U.S. government's placement of Huawei on its Entity List, effectively banning U.S. chip sales from Skyworks and others into the smartphone and networking equipment maker. Skyworks confirmed that Huawei made up 12% of revenue in the first six months of fiscal 2019, a bit higher than our estimate of high single digits as we wrote in our May 16 and May 20 notes but possibly because Huawei reportedly stockpiled RF chips in recent quarters ahead of an anticipated ban. Nonetheless, we continue to value Skyworks as if trade tensions between the U.S. and China will be resolved at some point, in turn positioning Skyworks for a bounce back in chip sales if and when demand returns from Huawei. We remain skeptical that Huawei can build smartphones without relying on RF parts from Skyworks and its U.S. based peers once this inventory buildup runs out. Although trade tensions continue to linger and the near-term picture might be bleak for Skyworks and other chipmakers, we are not anticipating a structural destruction in demand for Skyworks' RF chips as they remain key components in many wireless devices and perhaps more so in the future as 5G networks come online. With shares trading in the high $60 range, Skyworks still appears fundamentally undervalued to us and represents one of our Best Ideas within the Tech sector, albeit with near-term volatility associated with trade issues.

Skyworks cut its revenue guidance for the June quarter by about 7%, essentially equaling two months of sales into Huawei which, on the bright side, implies no other demand deterioration from other customers. Skyworks now expects sales in the range of $755 million-$775 million, down from guidance of $815 million-$835 million announced prior to the Huawei ban. Non-GAAP EPS is now expected to be $1.34, versus prior guidance of $1.50.

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