SWKS - Skyworks: Still Hold No Near-Term Catalyst Here

2023-11-15 08:00:00 ET

Summary

• We are maintaining our hold-rating on Skyworks.
• September quarter results and December quarter outlook confirm our belief of a muted smartphone, IoT and communications infrastructure TAM.
• Clearly, many investors were disappointed with the lower gross margin outlook due to lower factory loading as the company reduces its Balance Sheet inventory.
• The stock has declined about 16% since our downgrade in mid-August, underperforming the S&P 500 by 15%.
• While we believe most of the negatives have been priced into the stock, we don't see any meaningful catalyst for SWKS. We expect the stock to be an in-line performer through 1H24.

We continue to be hold-rated on Skyworks Solutions, Inc. (SWKS). While we like SWKS's positioning with Apple (AAPL) and MediaTek, we don't see any near-term catalyst driving financial outperformance. September quarter results and December quarter outlook confirm our belief of a muted smartphone, IoT, and communications infrastructure TAM in 2024. We think SWKS will struggle to outperform expectations.

We think financial performance this quarter was supported by the iPhone 15 cycle, with AAPL sales increasing 21% QoQ and accounting for 68% of total sales - we're less optimistic about demand tailwinds from AAPL ramping iPhone 15 through 1H24. We think smartphone TAM growth next year will be muted. We estimate the TAM to be flat to modestly up Y/Y, and without a material recovery in smartphone end demand, we don't expect SWKS to outperform.

The company derives the bulk of its revenues from its Mobile sales, up 25% this quarter to $790M, accounting for around 64% of total sales. Hence our neutral sentiment is largely based on our projections for smartphone TAM growth next year. Additionally, muted smartphone TAM growth is crucial to track as it can also reflect on IoT and communications. Total revenue declined 13.5% Y/Y and grew 14% QoQ to $1,218.8M. Management now guides for December quarter sales to decline 0-4% QoQ to the range of $1,175-1,225M, lower than consensus at $1.29B. We don't see SWKS outperforming consensus for the next quarter and see a less favorable risk-reward profile for the stock in 1H24.

We think the majority of the macro headwinds have been priced into the stock at current levels. The stock is down roughly 16% since our downgrade in mid-August, underperforming the S&P 500 by 15%. Our negative thesis of limited room for margin expansion due to the need to manage fab utilization and on-hand inventory level is playing out. Many investors were disappointed with the lower gross margin outlook due to lower factory loading as the company reduced its Balance Sheet inventory. This quarter, non-GAAP gross margin declined 40 basis points to 47.1%, and management now guides for non-GAAP gross margin of 46-47%; for reference, gross margin has been contracting for three consecutive quarters. We continued to see a more difficult and prolonged path to margin expansion, given the muted TAM in smartphone, IoT, and communications in 2024. We recommend investors stay on the sidelines for the near-term.

The following graph outlines SWKS stock performance against AAPL and the S&P 500 over the past three months.

Valuation

The stock is trading well below the peer group and is clearly undervalued. Still, we recommend investors avoid buying the stock on weakness as we don't see SWKS outperforming through 1H24. On a P/E basis, the stock is trading at 11.1x C2023 EPS $8.09 compared to the peer group average of 26.6x. The stock is trading at 3.2x EV/C2023 Sales versus the peer group average of 5.7x. We recommend investors stay on the sidelines until we see evidence of more material growth in the smartphone TAM next year.

The following chart outlines SWKS' valuation against the peer group.

Word on Wall Street

Wall Street also leans to a more neutral sentiment on the stock. Of the 31 analysts covering the stock, 12 are buy-rated, 17 are hold-rated, and the remaining are sell-rated. We think Wall Street is somewhat bullish due to SWKS's positioning with AAPL and MediaTek. We're bullish on SWKS in the mid-to-long run, but we don't see enough near-term catalysts to drive outperformance through 1H24.

The stock is currently priced at $90 per share. The median sell-side price target is $100, while the mean is $105, with a potential 11-16% upside.

The following charts outline SWKS' sell-side ratings and price-targets.

What to do with the stock

We remain less optimistic about SWKS in 1H24; we think the company won't see a material reacceleration in profits due to the lackluster smartphone TAM growth next year. Additionally, we don't see any upward revision happening for AAPL and, by extension, for SWKS. We think the macro weakness has been priced into the stock for the most part since our downgrade in August. We now expect the stock to be more of an in-line performer through 1H24.

For further details see: