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Morningstar | We Still Foresee a Long-Term Recovery at Skyworks; Maintain $105 FVE, Shares Undervalued

Skyworks Solutions reported solid fiscal second-quarter results in line with the company's previous guidance, and although the midpoint of the firm's fiscal third-quarter revenue forecast fell short of consensus estimates, we continue to foresee a longer-term bounce back in Skyworks' revenue thanks to 4G and 5G content in smartphones and other wireless devices. We suspect that fears around Skyworks may stem from Qualcomm's aspirations and potential to sell more 5G radio frequency content into devices, but we still think that Skyworks can leverage its narrow moat, in the form of intangible assets associated with decades of RF expertise in design, materials, manufacturing and packaging, in order to maintain its fair share of RF design wins well into the future. We will maintain our $105 fair value estimate for Skyworks, and we continue to see a decent margin of safety for investors today.

Revenue in the March quarter was $810 million, down 17% sequentially and down 11% year over year, but at the midpoint of the firm's prior guidance of $800 million-$820 million as discussed last quarter. Revenue was predictably soft due to sluggish smartphone unit sales, especially in China for not only Apple, but also Android-based phone makers, including local OEMs. Broad market (that is, non-smartphone) revenue fared well and rose about 10% sequentially. Despite lower sales levels, adjusted gross margin was flat with the year-ago quarter and down only 30 basis points sequentially to 50.7%.

For the September quarter, Skyworks expects revenue in the range of $815 million-$835 million, which would represent a 7%-9% year-over year decline but 1%-3% sequential growth. More important, Skyworks foresees the market improving and has a "strong pipeline" of design wins for the second half of the calendar year, suggesting that its chip content in Apple's next lineup of iPhones appears secure.

Looking at revenue, we note that Skyworks remains highly exposed to Apple and we expect Skyworks to generate revenue from Apple in the mid-40% range for fiscal 2019, consistent with 47% earned in fiscal 2018. The company again stressed that it believes it is comfortable with its pipeline with Apple in the second half of calendar 2019.

We recognize the risk that Apple's baseband chip agreement with Qualcomm, presumably for 5G smartphones to be launched in late 2020, may lead to Qualcomm leveraging its baseband expertise into selling more RF content into Apple. Nonetheless, we note Skyworks' strong partnership with Apple over the entire life of the iPhone (whether Qualcomm was the baseband provider in years past or not). We are skeptical that Apple will willingly break its relationships with current RF partners to move entirely to Qualcomm RF solutions, even if such products are on par with Skyworks (and it is quite possible that certain RF products won't be at parity). Our valuation of $105 assumes that Skyworks essentially maintains its existing RF content in Apple iPhones going forward, but we are not modeling an acceleration of dollar content per iPhone in the future.

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