Skyworks Solutions: Dividend Increase Signals Confidence

Investment Thesis

Skyworks Solutions, Inc. (NASDAQ:SWKS) specializes in creating cutting-edge technology solutions, such as advanced wireless connectivity and analog products, that power various devices like smartphones and routers.

They focus on ensuring these devices can connect seamlessly to the internet and deliver high-performance features. Additionally, Skyworks is expanding into new areas like the automotive sector, working on technologies to improve vehicle connectivity and other nascent markets like the IoT.

Fundamentally, Skyworks Solution is growing its profitability at a rapid rate. Even though its stock hasn't gone far in 2023.

I recognize that this investment thesis isn't blemish-free. As we'll soon discuss, its growth rates are showing no traction.

But I nevertheless believe that investors' expectations right now are fairly muted, and believe that paying less than 9x this year's free cash flows (or approximately 10x this year's EPS), makes up for its lackluster growth in the short term.

Skyworks Solutions' Near-Term Prospects

Skyworks Solutions produces semiconductor components designed for wireless communication devices. They specialize in creating high-performance analog and mixed-signal semiconductors used in a wide range of consumer products, particularly emphasizing their role in enhancing wireless connectivity.

Thanks to its M&A focus, Skyworks has established itself as a leading figure in network technologies, encompassing cellular and advanced Wi-Fi solutions.

Skyworks aims to address the intricate connectivity obstacles of the digital age by implementing cutting-edge standards that strive to resolve analog, mixed-signal, and radio frequency signals within current hardware and network infrastructure for wireless communication systems.

Skyworks is actively advancing its product portfolio in the near term, with a strong emphasis on cutting-edge technology offerings. The company is continuously introducing innovative high-performance connectivity and analog solutions designed to meet the evolving demands of mobile and broad market customers.

One notable focus is on enabling 5G technology adoption, securing content for Android smartphones, and supporting Wi-Fi 7 deployments. Here's a quote from its earnings call that reinforces this viewpoint,

In mobile and IoT, we secured 5G content for Android smartphones across all tiers. We delivered Sky5 platforms for broadband CPEs of leading North American carriers. We supported Wi-Fi 7 launches, our tri-band routers for NETGEAR and TP-Link and Powered Bell's Wi-Fi 6E home gateway.

Furthermore, Skyworks is also expanding its reach into the automotive sector, demonstrating its commitment to diversifying its product offerings.

All the while, the company's strategic positioning aligns it well with nascent market trends, including generative artificial intelligence, or AI, and the growing demand for wireless infrastructure and cellular connectivity solutions.

Skyworks' advanced integrated offerings cater to these trends, providing support for a variety of wireless protocols used in billions of IoT products.

Further, Skyworks' IoT prospects appear promising as the company leverages its advanced integrated solutions to tap into the burgeoning IoT market. With the increasing adoption of IoT devices across various industries, including smart homes and industrial automation, plus other sectors, Skyworks is well positioned to provide essential connectivity and wireless solutions.

Given this framework, now let's look beyond its narrative and discuss its fundamentals.

Revenue Growth Rates Leave a Lot to be Desired

Skyworks' Q4 2023 guidance should have started to deliver some topline improvements, particularly given that its comparables with the prior year are starting to ease up.

And yet, despite the easier comparables, Skyworks' guidance still points to negative double-digit growth rates.

I believe it's fair to say that although Skyworks is actively pursuing growth and product innovation, it faces challenges associated with the broader market environment, including soft demand in certain segments like the Android ecosystem and ongoing macroeconomic headwinds. As such, these challenges continue to impact its revenue growth rates.

Next, let's discuss the bull case for investors.

SWKS is Cheaply Valued At 10x Forward P/E

I recognize that Skyworks' revenue growth rates are poor. And even though that's obviously true, there aren't many companies seeking to address the sprawling IOT market that are priced at 10x forward earnings.

Yes, Skyworks does carry a slightly leveraged balance sheet, with approximately $600 million of net debt. On the other hand, the business is evidently highly free cash flow generative.

In fact, I believe it's possible that Skyworks will make $1.8 billion of free cash flow this year. Moreover, Skyworks has recently increased its dividend payout by 10%, which is clearly a sign of confidence in its underlying prospects.

The Bottom Line

I'm bullish on Skyworks Solutions and its future prospects. This company specializes in creating cutting-edge technology solutions that power a wide range of devices, including smartphones and routers, by ensuring seamless internet connectivity and high-performance features. Additionally, Skyworks is expanding its presence in emerging markets like the automotive sector and the Internet of Things (IoT).

Skyworks has been growing its profitability at a rapid pace, even though its stock performance in 2023 hasn't reflected its potential. I acknowledge that there are challenges, including soft demand in certain segments and macroeconomic headwinds, affecting revenue growth.

However, I believe investors' expectations are currently modest, and Skyworks is attractively valued at 10x forward earnings. The company's strong free cash flow generation and a recent 10% increase in its dividend payout demonstrate confidence in its future prospects. With its focus on advanced technology and diversification efforts, Skyworks is well-positioned to thrive in the evolving tech landscape.

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