Skyworks Solutions (NASDAQ:SWKS), a leading semiconductor company headquartered in California, had a disappointing 2023 in the market, with the chip sector facing several headwinds. Now, Skyworks stock is finally gearing up for a bull run with the demand environment continuing to show improvements, as evident from the company’s Q1-2024 earnings released on January 30. I am bullish on Skyworks, as I believe the company is attractively valued at a time when its prospects are improving.
The Improving Demand Outlook
For the first quarter of Fiscal 2024, Skyworks reported revenue of $1.2 billion and earnings per share of $1.97. The company generated record operating cash flows of $775 million for the quarter and record free cash flows of $753 million. These achievements came on the back of a near-10% year-over-year decline in revenue, highlighting the noteworthy efficiency improvements booked by the company to start the new Fiscal year on the right foot.
Skyworks is booking efficiency gains at a time when the semiconductor sector is beginning to turn a corner. This is encouraging news for investors.
According to Gartner (NYSE:IT), global semiconductor revenue declined by 11% in 2023 due to an inventory glut that stemmed from waning demand for high-performance chips. However, inventory levels are expected to normalize this year, paving the way for chip manufacturers to convert the surging demand for chips into financial gains. Gartner predicts global semiconductor revenue to grow by 17% this year to $624 billion.
During the Q1 earnings call, Skyworks CEO Liam Griffin confirmed the ongoing recovery in demand and highlighted the stabilizing demand environment across Android ecosystems. The CEO went on to claim that excess supply conditions are abating and that inventory levels at the OEM level are normalizing. These remarks suggest Skyworks will be a beneficiary of the improving prospects for the chip sector this year.
Leading Android smartphone manufacturers, including Samsung and Oppo, have struck a bullish stance for 2024, which is good news for Skyworks. Global smartphone shipments declined in both 2022 and 2023, but IDC projects unit shipments to grow by a modest 4% this year, marking the beginning of a new cycle in which smartphone shipments will continue growing through 2027.
This improving outlook for the smartphone sector should enable Skyworks to grow in the foreseeable future. Skyworks is one of the leading component suppliers to Android smartphone makers and is also a major supplier of chips to Apple (NASDAQ:AAPL). The Mobile segment accounted for 71% of revenue in Q1, while the Broad Markets segment accounted for the remainder.
Apple is the largest customer of Skyworks and generally accounts for more than half of its revenue. This high concentration on one customer increases the business risk for the company, but so far, Skyworks has managed this risk commendably by emerging as an indispensable partner of Apple that produces advanced chips with high radio frequency content. In the 5G era, smartphone manufacturers are trying to partner with chip companies with proven experience in delivering high-quality components, and Skyworks is one.
Investments, New Partnerships, and Diversification Efforts
Skyworks Solutions is investing in its future by focusing on strategic investments in product development to position the company to secure more design wins in key market segments. The company continues to look for value-accretive partnerships as well. Examples of recent deals include the expansion of its WiFi design pipeline with key partners such as Cisco Systems (NASDAQ:CSCO), Linksys, and TP-link.
Skyworks is investing in next-generation wireless standards such as WiFI 6E and 7 as well, which should enable the company to play a critical role in the ongoing upgrade cycle.
In a bid to diversify revenue sources, Skyworks is actively expanding into new market segments, which is another promising sign. In Q1, the company secured several design wins in the infrastructure development sector, including optical transport products for a leading, undisclosed operator in India. The company also reported a few design wins in the automotive sector, covering telematics, infotainment systems, and onboard chargers with a few OEMs.
Is Skyworks Solutions Stock a Buy, According to Analysts?
Skyworks may face some pressure if Apple iPhone sales lose some steam in 2024 amid inflationary pressures. Plus, Wall Street analysts seem divided on the prospects for the company.
For instance, on January 10, BMO Capital Markets identified Skyworks as a best-in-class growth company trading at a reasonable valuation in addition to 24 other tech companies. According to BMO (NYSE:BMO), these 25 companies could outperform the broad market this year, even if the momentum behind tech stocks loses some strength.
KeyBank Capital Markets, however, struck a cautious stance for Apple’s key suppliers, as the research firm believes demand for Apple devices will not be impressive in 2024.
Overall, based on the rating of 23 Wall Street analysts, SWKS stock comes in as a Moderate Buy. The average Skyworks stock price target is $111.68, which implies upside of 8.5% from the current market price.
Despite the seemingly limited upside potential based on Wall Street rankings, Skyworks stock seems well-positioned to turn a corner this year, aided by the improving demand environment for the semiconductor sector.
Cheaply Valued
Skyworks Solutions, at a forward P/E of 14.8, looks cheaply valued at a time when the chip sector is setting up for a breakout after two consecutive years of disappointing performance. For context, during the previous up-cycle in 2019 and 2020, Skyworks traded at average P/E multiples of close to 20. With the chip sector turning a corner today, it seems reasonable to expect Skyworks to enjoy an expansion in valuation multiples this year.
The quarterly dividend of 68 cents per share, coupled with stock buybacks, improves the investment appeal of Skyworks further.
The Takeaway: Skyworks is Cheap and Attractive
Skyworks Solutions is nearing an inflection point, with the semiconductor industry projected to register positive growth this year after a disappointing 2023. Skyworks is strategically investing in new products and partnerships to drive earnings growth, and the company seems to be trading at an attractive valuation amid the continued demand stabilization in the chip sector.
