As trade tensions continue to linger, one of the sectors that I think is going to keep seeing pressure on a global scale is Semiconductors. A recent study indicates that while this sector remains the second-largest exporting industry in the United States, its global market share has eroded, with much of its production, and even research and development investments shifting to China, Taiwan, and much of Asia. This is no doubt a part of the reasoning behind the Trump administration’s push to impose tariffs on Chinese technology imports. It is a core reason that while demand for semiconductors is likely to remain strong, costs are also likely to increase the longer the standoff between the U.S. and China continues. The question about what semiconductor producers will do – passing the costs on to their customers, or absorbing the costs themselves – isn’t encouraging for investors, because either option poses problems.
Today’s stock is a company with a great fundamental profile, and that operates in what is likely to be one of the biggest growth areas of the entire technology space. Skyworks Solutions Inc. (SWKS) built its business by providing connectivity solutions to mobile devices like smartphones. It remains a key supplier for Apple’s (AAPL) iPhones, but has also diversified its business into the Internet of Things (IoT) space with applications for autos, smart home devices, and industrial equipment. Why do I think this is going to be such a big deal for future growth? The short answer is 5G. Most of the companies that will be providing the backbone of 5G connectivity – wireless towers and so on – are required to complete the buildout of their respective networks by 2020 or they will lose the 5G spectrum leasing rights they have collectively invested hundreds of billions (and quite possibly trillions) of dollars into. As those networks come online, demand for IoT devices that can connect to them are sure to be in high demand, on a consumer and industrial level. That said, SWKS has big exposure in Asia, with Goldman Sachs reporting earlier this year that the company derives 85% of its sales in China, and so prolonged, unresolved trade tensions and tariffs could significantly erode their profit margins.
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 $17.6 billion.
- Earnings and Sales Growth: Over the last twelve months, earnings and sales both increased, with earnings growing almost 13% while sales increased about 7.25%. Growing earnings faster than sales is difficult to do, and is generally not sustainable in the long term, but it is also a positive mark of management’s ability to effectively maximize the company’s business operations.
- Free Cash Flow: SWKS has very healthy free cash flow of more than $1.2 billion over the last twelve months. This is a number that has more than doubled since mid-2016.
- Debt to Equity: SWKS has had zero debt on its balance sheets since the beginning of 2015, which means that all of its operating profits can be used to fund research and development, expand its offerings, and bolster its cash and liquid assets. As of the last quarter, the company had more than $1.8 billion in cash, an increase of 80% from mid-2016 when it was a little under $1 billion.
- Dividend: SWKS pays an annual dividend of $1.28 per share, which at its current price translates to a dividend yield of 1.32%.
- Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for SWKS is $22.34 per share. At the stock’s current price, that translates to a Price/Book Ratio of 4.30. Ratios closer to 1 are usually preferred from a value-oriented standpoint, however higher multiples aren’t that unusual, especially in certain industries. The average for the Semiconductor & Semiconductor equipment industry is only 4.1; this is also the historical average for SWKS. That generally implies SWKS is fairly valued at current price levels. On a Price/Cash Flow basis, however, the stock is trading more than 34% below its historical average, suggesting a long-term price target of $128 per share.
Here’s a look at the stock’s latest technical chart.
- Current Price Action/Trends and Pivots: The red, diagonal line traces the stock’s upward trend trend dating back to July of last year. It is also the basis for calculating the Fibonacci retracement lines on the right side of the chart. The stock sitting practically on top of the 38.2% retracement line and has used this level for significant support multiple times since December of last year. That could give the stock another bounce, with short-term upside around $102 per share. Under current market conditions, that would likely require some kind of macroeconomic catalyst such as easing trade tensions rather than a quantitative, fundamental basis. If the stock breaks below $94, the next likely support is around $87 per share, which is also where the 50% retracement line sits. Assuming the U.S. – China trade relationship continues to deteriorate, the next likely support level around $80, or even lower is certainly not out of reach.
- Near-term Keys: If the stock breaks below $94 as just mentioned, I believe the stock should easily drop to as low as $87 before finding any kind of significant support. An additional break below $87 would confirm a legitimate downward trend that could keep the stock dropping to somewhere between $65 and $71 per share. These could be interesting opportunities for shorting the stock or working with put options. If the stock does recover bullish momentum and manages to break the $102 level, there could be an attractive opportunity to work with the long side by either buying the stock outright or using call options.