2023-05-16 10:29:26 ET
Summary
- We remain buy-rated on Skyworks Solutions, Inc. as we expect the company to outperform the peer group in 2024.
- We understand investors' concern after Skyworks lowered its gross margin expectation for the 2H23 because of fab underloading as the company reduces on-hand inventory due to lower-than-expected unit industry demand.
- Skyworks Solutions stock, however, is up roughly 15% since our upgrade in November, outperforming the S&P 500 by 5%.
- We expect growth to be driven by content growth with Apple, volume growth at MediaTek, and the recovery of Android smartphone demanding 2024.
- We believe it’s a good time to explore entry points on pullbacks, as we believe gross margin will expand back to the 50%+ range as customers demand recovers.
We continue to be buy-rated on Skyworks Solutions, Inc. ( SWKS ) post fiscal Q2 2023 earnings results ; we expect the company is well positioned to outperform the peer group in 2024, driven by content growth with Apple Inc. ( AAPL ) and volume growth at MediaTek and rebound of the Android smartphone demand next year after rigid inventory correction cycles.
For fiscal Q2, SWKS reported revenue of $1.153B, down 13% sequentially and in line with consensus estimates, while Non-GAAP EPS came in at $2.02, slightly missing consensus. The stock dipped about 7% since earnings to date mainly due to investor concern about the company's weaker-than-expected gross margin guidance for 2H23; we believe the lower revenue and gross margin expectations are due to fab underloading as SWKS reduces on-hand inventory to match the lower-than-expected unit industry demand. In 3Q23, SWKS projects its gross margin to be around 47% to 48%, significantly below the consensus of 51%. We expect underutilization headwinds to impact SWKS' financials in 2H23, but we believe the stock is well-positioned to outperform in 2024.
The stock is up roughly 15% since our upgrade in November, outperforming the S&P 500 Index (SP500) by 5%. The stock price may remain volatile through 2H23 due to macroeconomic headwinds pressuring financial results. Still, we expect SWKS to outperform in 2024 and recommend investors begin looking for entry points on pullbacks as we believe gross margins can expand back to the 50% plus range once customer demand recovers.
The following graph outlines our rating history on SWKS.
2Q23 & what's next
We expect SWKS' outperformance to be driven by content growth with AAPL as well as volume growth at MediaTek and the recovery of Android smartphone demand in 2024. This quarter, 2Q23, AAPL accounted for a massive 64% of total sales, and we expect this percentage will remain reasonably robust in 2H23, albeit offset by the continued sluggish Android demand. Android markets have been going through aggressive inventory correction cycles for at least three quarters now; we've recently upgraded Qorvo, Inc. ( QRVO ) on the belief that the Chinese Android OEMs' inventory correction cycles are now over. In spite of management's pessimistic outlook on continued inventory correction cycles, we expect SWKS will benefit from demand recovery in the Android markets in 2H23 and throughout 2024. Any output from the company to Android markets will help boost revenues and create sequential growth, as 2Q23 showed roughly zero Android sales, with Mobile sales at $629M, down 20% sequentially, and AAPL sales at 64% of total revenue, amounting to $738M. This leaves no room for Android demand to be reflected on earnings because there was no Android demand. Any growth in Android demand now will show up as a positive sequential growth on SWKS' 3Q23 earning results.
We see near-term headwinds through 2H23 pressuring the company's financials, which is visible with the weaker-than-expected gross margin and revenue outlook. We see gross margin compression due to lower fab utilization as the company adjusts internal inventory levels to match the weaker-than-expect demand in 2H23. SWKS is significantly exposed to the smartphone market, and we forecast the smartphone TAM to contract by around 2.5% to 1.18B in 2023 compared to 1.21B last year. Canalys' latest research highlights that global smartphone shipments fell 13% in 1Q23 alone.
We expect SWKS' financials to be under pressure in the near term as the company maneuvers the weaker smartphone demand, but we believe SWKS will experience content growth with AAPL despite the macro headwinds. AAPL is uniquely positioned to boost content growth due to the company's installed base, which is superior to peers in the smartphone market, enabling AAPL to sustain sales with less risk and without giving into competitive pricing. According to IDC, AAPL's share in the smartphone market is expanding over the past year from 18% in 1Q22 to 20.5% in 1Q23.
Our bullish sentiment is driven by our belief that SWKS can offset the weaker unit growth in the near term through content growth with its biggest customer, AAPL. We also expect collaborations with MediaTek on modem-to-antenna automotive-grade 5G solutions will drive revenue growth down the road as the 5G market expands. Near-term headwinds from Android smartphone correction and iOS seasonality persist. Still, we believe SWKS is relatively resilient, cutting fab utilization to work through excess inventory and speed up the market recovery. We also expect the company to come out of the demand slump running and revisit gross margin highs of the 50% plus range once consumer demand picks back up.
Valuation
The stock is relatively cheap, trading well below the peer group average. On a P/E basis, the stock is trading 11.6x C2023 EPS $8.55 compared to the peer group average of 24.3x. The stock is trading at 3.5x EV/C2023 Sales versus the peer group average of 5.2x. We see an upside ahead for SWKS in 2024 and recommend investors being looking for entry points into the stock at current levels.
The following chart outlines SWKS' valuation against the peer group.
Word on Wall Street
Wall Street is divided on the stock. Of the 32 analysts covering the stock, 15 are buy-rated, 16 are hold-rated, and the remaining are sell-rated. We attribute Wall Street's strong bearish sentiment on the stock to the current macro backdrop and inventory correction cycles weighing SWKS' financials.
The following chart outlines SWKS' sell-ratings and price targets.
TechStockPros
What to do with SWKS stock
We maintain our buy rating on SWKS despite the weaker-than-expected gross margin guidance for 2H23. We see some more short-term pain primarily due to factory underutilization and inventory correction cycles as the company reduces output to meet demand realities. However, we continue to expect SWKS to be well-positioned to outperform in 2024, driven by content growth with AAPL and unit growth with MediaTek and Androids as inventory correction cycles complete.
The Skyworks Solutions, Inc. stock price remains volatile in the near term due to the macroeconomic environment; it is currently trading 23% higher than its 52-week low of $76.16. We believe investors who begin exploring entry points into Skyworks Solutions, Inc. stock on pullbacks will be well rewarded in 2024.
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For further details see:
Skyworks Solutions: Eyeing 50% Plus Margins In 2024