There’s More to This Chipmaker Than Just Apple

Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

“Apple Cuts Orders for iPhone Parts” said the Wall Street Journal  a few weeks back, and what followed was a beat down of all things Apple (NASDAQ: AAPL). The Cupertino-based giant saw its shares slip below the $500 mark that day and component suppliers, as always, shared Apple’s pain.

But, as Fool analyst Evan Niu rightly pointed out, Apple couldn’t have possibly sold 65 million iPhones in the quarter succeeding the holiday season. And given the blind-eyed nature of the Street, which seems to have a habit of focusing on all things negative about Apple, the revelation was met with disdain even though it wasn’t something new.

A steady stream of negative “news” (more of rumors) such as the one above have not only dragged down Apple, but also those companies from whom it sources components for iDevices. Thus, it comes as no surprise that a terrific company such as Skyworks Solutions (NASDAQ: SWKS) has depreciated almost 27% since the iPhone 5 launch, until it reported a spectacular first quarter report.

Not just an Apple play, but a smartphone play

Back in September, when Skyworks shares fell to the ground for no specific reason, I had said that the company would bounce back, and so it did. A record number of iPhones and iPads sold in the previous quarter were just one of the reasons behind Skyworks’ stellar performance. Skyworks derived 29% of its revenue from Foxconn in fiscal 2012, followed by Samsung at 17%.

Thus, using the phrase “Apple supplier” without digging into the details as many do to garner clicks won’t do justice to Skyworks. The company has been building its presence in Samsung’s books, and its efforts are bearing fruit since its Samsung account improved 6% in FY12 from FY11. Also, Skyworks expects its ongoing quarter to be better than analysts expect.

Better than the rest

Management calls for revenue of $420 million and adjusted earnings of $0.47 per share in the current quarter, better than the revenue estimate of $417 million and in-line with earnings estimates. An upbeat guidance from Skyworks would have come as a surprise to many, given the fact that Apple supplier Cirrus Logic (NASDAQ: CRUS) had guided below Street estimates last week.

Cirrus Logic derived 91% of its revenue from Apple in the previous quarter, and witnessed a 153% top line jump along with an improvement of 105% on the bottom line. However, its revenue guidance of $200 million to $220 million came in behind the $234.9 million analyst estimate. But, Skyworks isn’t Cirrus since it enjoys the benefit of diversification.

Presence in Samsung’s devices is without doubt a huge advantage that Skyworks enjoys. And this could be one of the reasons the management is looking to beat seasonality and deliver growth in the current quarter. The company had supplied power amplifier modules for the Galaxy S III, and with the next iteration of Samsung’s flagship on the way, Skyworks' top line would have yet another driver.

China and more

Skyworks is also looking at the Chinese cellular market to fuel its growth further. Consumers in China are moving to smartphones from feature handsets. As a result, there’s a lot of room for growth of 3G/4G enabled devices in the region, and this is good news for Skyworks.

But mobile devices are not the only area from which Skyworks is looking to derive growth. The company is looking to benefit from growth in connectivity in general by way of its cutting-edge radio frequency solutions. Home appliances, medical devices, home entertainment systems and car infotainment are the various applications that can help Skyworks increase its addressable market.

Final words

Skyworks CEO David Aldrich said that analysts expect the number of connected devices to exceed 50 billion in the next decade, and Skyworks is intent on making the most out of it. It has solid clients, is looking to benefit from smartphone growth in the world’s largest cellular market along with overall growth of connected devices. And to buy into all this positivity you don’t need to pay up much.

A trailing P/E of 20.5 times is well below the industry average of 22 times, while Skyworks also sports of an industry leading PEG ratio of 0.66. Analysts expect a marked improvement in earnings going forward, as evidenced by a forward P/E of just 9 times. Hence, Skyworks is a company with great prospects, it isn’t too expensive, and should deliver impressive returns in the long run.

TechJunk13 has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Cirrus Logic. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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