In 2014, we are exposed to literally dozens of devices every day that were not so long ago thought to be only science fiction or imagination. From our touchscreen smartphones, internet enabled televisions, or cars that can drive themselves, there are endless examples. Let me discuss about Skyworks Solutions.
But underneath these glossy, polished exteriors are highly complex arrays of components and parts that deliver the incredible functions that we have come to take for granted that power our everyday lives.
One of the key components to almost all smart and connected devices is the humble semiconductor. By producing these at precisely the same time as the demand for them is skyrocketing, Skyworks Solutions (SWKS) is poised to capitalize in a very big way. Technology experts predict that by 2020 there will be a staggering 70 billion internet connected devices in operation across the world.
It is this demand that has driven the share price of Skyworks from below $30 at the beginning of the year to recent highs more than double that at $70. So can Skyworks hold on to these lofty gains and continue to drive their business forward?
Understanding the Business
Skyworks Solutions is a relatively new company in its present form. It took its current corporate structure after a merger between two former industry giants in 2002: Alpha Industries and the division of Conexant that specialized in wireless communications.
This piece of timing turned out to be a “company maker” with the entire technology industry on the cusp of a seismic shift to wireless radio frequency devices. These changes were driven in part by the increased demand of industry but the true growth engine was the insatiable demand for a new kind of consumer electronics: the smartphone, tablet and laptop computer.
Currently Skyworks is involved in designing and producing the raw components that power the modern world. These include amplifiers, detectors, power management devices, receivers, technical ceramics as well as dozens more that are far more technical and specialized.
Metrics and Measures
The quarterly earnings report that the company released at the beginning of November showed clearly the integral part the company plays in a range of industries. The quarterly revenue for the company was a huge $718 million, which was made even more impressive by the fact that it was a 51% increase on the same time last year. In addition, it was a 22% increase on the quarter immediately before it.
The company also showed a pleasing expansion in margins from 27.6% to 32.8%. With the continued revenue expansion coupled with margin expansion, it is possible to infer two things. The first is that customers are willing to pay more for the products that the company creates, meaning they have a strong market position. The second is that demand may be outpacing supply, which is allowing the Skyworks (SWKS) to charge a premium price for their products.
These factors led to an operating income increase that was up 81% on the last quarter, coming in at well over $235 million.
The Investment Case
The investment case for Skyworks (SWKS) is based on a very powerful current trend and an even more powerful emerging one.
The current trend is the phenomenon of connected personal devices. In developed economies like the United States, Canada and the Europe, the vast majority of the population now has access to, or owns devices like smartphones and tablet computers. This means that the demand for the devices that the company makes is already incredibly high as new models are constantly brought out to replace older ones.
In addition, this growth story still has a long way to go, with nations with billion plus populations like China and India yet to achieve the same level of smartphone and internet penetration as more advanced economies.
The other major driver of Skyworks’ future success is the “internet of things” thesis. This is the concept that very soon, many more devices and things will have internet connections. This can include anything from the entertainment systems in cars to sensors in homes that can adjust the specific temperature of rooms automatically when they are in use or depending on weather conditions.
Threats to the business include other companies producing devices that replicate the solutions that the company offers for cheaper prices. This threat is particularly present from nations like Japan, South Koreaand China as they may be able to gain cost advantages through more automation or cheaper labor. Offsetting this is the deliberate way in which Skyworks has positioned itself to produce more premium products for higher end customers.
Skyworks (SWKS) is a company with huge revenues and increasing profits and margins. This financial strength is backed by an exposure to a truly transformational industry which already has high demand for the products the company makes, along with the potential to be much larger in the future.