I’m a bit of a tech nerd, and as such, it means that one of the sectors of the market I tend to gravitate to very easily is Technology. Over the last few years, a big subject of focus in that sector has been the implementation and rollout of 5G infrastructure, and in the last year or so 5G adoption at the consumer level. That’s because over the last year, a number of companies in the Semiconductor industry, who have been investing heavily in developing the technology that 5G relies on for years, have provided details about 5G adoption in their earnings reports.
Despite ongoing concerns over the past two years driven by the global pandemic that shuttered business activity in multiple areas of the economy in 2020. Activity started to pick up last year, with 2022 shifting the conversation to inflation and how to keep economic activity limited to sustainable levels.
When it comes to 5G and the Internet of Things, that has actually put supply shortages that Semi stocks were dealing with even prior to the pandemic into even sharper focus. Those shortages are still in place, as production facilities are still not running at full capacity to keep up with chip demand. That is one of just a number of issues that have contributed to the current rise in inflation that has prompted the first of several expected interest rate increases from the Federal Reserve.
Another interesting element is an undercurrent of nationalist fervor about chip manufacturing that even the current Presidential administration has carried over from the Trump years. That sentiment has put difficult barriers in place for Semiconductor companies relying on chip production out of China and other parts of Asia, which just adds a little more fuel to the already-burning fire. The anti-Asia production trend is strong enough, for example that Intel Corp (INTC) announced last year it would invest billions of dollars to build its own forge operations in Arizona, creating a new business segment that stands not only to service INTC’s own needs, but also to potentially act as a production partner for the entire industry in the United States.
Skyworks Solutions (SWKS) is a company that specializes in radio frequency (RF) ships for smartphones and other “smart” technologies that make up the Internet of Things. Its earnings reports throughout 2021 made it clear that the issues I just described carried an impact on the company’s operations, but at the same time, it has also seen significant growth in Free Cash Flow, and surprisingly stable operating profitability over the last year. Part of that was the inclusion of SWKS’ products in the iPhone 12 in 2020, which was Apple’s (AAPL) first entry into 5G, and also a bit of serendipity owed to the post-trade war political climate, as SWKS reported the capture of market share that had previously been attributed to Chinese producers like Xiaomi. Industry analysts also predict the company will continue to benefit from increasing 5G adoption as well as WiFi infrastructure improvements that will include SWKS RF solutions.
This is a stock that saw a BIG run up in price from a September 2020 low at around $131 to a late April 2021 peak at around $204 per share. From that point, the stock has moved into a long-term downward trend that now has the stock sitting at around $117 per share. For growth investors, that makes SWKS radioactive, and a stock to keep as far from an active portfolio as possible, but for a value investor, it begs the question of the stock’s price movement relates to its fundamental profile. Has the stock dropped so far that the market might now be discounting it too much? If so, SWKS could be a stock you should be paying attention to.
Fundamental and Value Profile
Skyworks Solutions Inc. designs, develops, manufactures and markets semiconductor products, including intellectual property. The Company’s analog semiconductors are connecting people, places, and things, spanning a number of new and unimagined applications within the automotive, broadband, cellular infrastructure, connected home, industrial, medical, military, smartphone, tablet and wearable markets. Its geographical segments include the United States, Other Americas, China, Taiwan, South Korea, Other Asia-Pacific, Europe, Middle East and Africa. It operates throughout the world with engineering, manufacturing, sales and service facilities throughout Asia, Europe and North America. It is engaged with key original equipment manufacturers (OEM), smartphone providers and baseband reference design partners. Its product portfolio consists of various solutions, including amplifiers, attenuators, detectors, diodes, filters, front-end modules, hybrid, mixers, switches, and modulators. SWKS has a current market cap of $19.1 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined by about -6.15%, while sales were flat, but positive at 0.03%. In the last quarter, earnings grew by almost 20%, while sales increased by 15.22%. SWKS operates with an impressive margin profile that has held up very well over the past year; Net Income was 27.18% of Revenues over the last twelve months, and tapered slightly in the last quarter to 26.48%.
Free Cash Flow: SWKS has healthy free cash flow, of about $1.25 billion over the last twelve months. This number has improved over the last year when it was $1.14 billion and $815.1 million in 2020. The current number translates to a Free Cash Flow Yield of 6.47%.
Debt to Equity: While SWKS had zero debt on its balance sheets since the beginning of 2015, the company took on a significant amount of debt at the beginning of 2021 to help bolster its balance sheet. Cash and liquid assets as of the last quarter were a little over $1 billion versus a $2.9 billion in long-term debt. Their healthy operating profile and generally solid balance sheet gives the company more than adequate ability to service their debt and invest in growing their business.
Dividend: SWKS pays an annual dividend of $2.24 per share, which at its current price translates to a dividend yield of about 1.9%. It should be noted the company boosted its dividend in 2021 by 12% to its current level, following a raise in 2020 when a lot of other companies throughout the stock market were suspending or eliminating dividend payouts to preserve cash.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $142 per share, which means that SWKS is nicely undervalued, with about -21% upside from its current price.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above displays the stock’s price activity over the past year. The red diagonal line traces the stock’s downward trend beginning in May of last year at around $204 to its current low at around $117. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock appears to be trying to stabilize at its $117 low point, which was reached about a week ago, and marking current support at that level. Immediate resistance is around $124. A push above $124 should see upside to about $131 before finding next resistance, while a drop below $117 could see downside to about $110 before finding next support, using the distance between current support and resistance levels as a reference point.
Near-term Keys: SWKS’ long-term downward trend has pushed the stock to the point where it is becoming hard for a smart bargain hunter to ignore. The Tech industry in general is seeing increased volatility this year, which means that there could be more downside ahead for this stock; but if you are willing to tolerate near-term uncertainty and volatility, I think the value proposition, along with the company’s long-term prospects, is very interesting. If you prefer to focus on short-term trading strategies, there could be some useful opportunities to work with the stock’s current price activity. A push above $124 could offer an interesting signal to buy the stock or work with call options, with $131 providing a useful bullish profit target. A drop below $117, on the other hand could be a signal to consider shorting the stock or buying put options, using $110 as a practical profit target on a bearish trade.