SWKS Stock: Have Headwinds Made Skyworks a Buying Opportunity?

Skyworks stock took a hit when its largest customer, Apple, was the subject of a bearish analyst research note. But could this present an opportunity for investors?

Skyworks Solutions [SWKS] is a semiconductor company that primarily supplies components to smartphone manufacturers. Its biggest customer is Apple [AAPL], with the iPhone-maker accounting for 64% of Skyworks’ total revenue in 2023.

While being a preferred supplier to one of the world’s largest smartphone firms has advantages, it may also have downsides — as was seen when Apple’s near-term prospects were questioned by analysts.

Is Hardware Demand Softening?

On October 1, Barclays analysts issued a research note warning of weakening demand for Apple’s iPhone 16 (IP16). 

Apple “may just have cut roughly 3 million units at a key semiconductor component in iPhones” for the December quarter, the note said. According to analysts, this reduction in build numbers, along with Barclays’ previous note observing shorter lead times for iPhone models, indicates “softer demand for IP16”.

Apple will not be the only stock impacted, if Barclays is correct. The company’s suppliers could also see business decline, with potentially serious implications for Skyworks’ share price.

The Impact on Suppliers

During a bull market, ‘pick and shovel’ stocks — those creating the components that underpin a market — can gain faster than stocks further down the value chain. However, the inverse may be true during hard times.

Apple’s share price fell 2.91% on October 1 in response to Barclays’ report. Skyworks was hit even harder, with SWKS stock falling 3.38%.

Skyworks’ share price is down 11.68% year to date to 11 October, and 5.44% down over the past six months. In addition, Skyworks’ revenue fell 13% in the 2023 fiscal year, and is expected to fall again in 2024.

However, bulls argue SWKS stock was previously undervalued, especially considering the fact that it has paid increasing dividends for the last five years, while it boasts strong margins. Could the recent slump present investors with a buying opportunity?

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SWKS and the Competition

Two other semiconductor stocks caught in the wake of Apple’s slump are Qualcomm [QCOM] and Qorvo [QRVO].

Qualcomm makes modems for iPhones, while Qorvo designs and manufactures radio frequency (RF) chips used globally in almost all smartphones. The pair’s share prices fell 2.51% and 3.41%, respectively, following the Barclays note. 

Source: Yahoo Finance

Skyworks stock is relatively expensive compared to sales (P/S ratio), in comparison to Qorvo. More concerning may be the fact its revenue is expected to decrease significantly this year.

Qualcomm, while the most expensive stock based on trailing revenue, is expected to post the strongest revenue growth of the three this year.

SWKS Stock: The Investment Case

Bull Case for Skyworks

Skyworks could be poised to benefit from an upcoming smartphone renewal cycle, as users upgrade older models to access new AI-enabled lines.

“Over the medium to long term, we expect generative AI applications will migrate to the edge, including the smartphone, driving a meaningful replacement cycle and leading to higher levels of RF complexity,” Liam K. Griffin, chairman, CEO and president of Skyworks, said in the company’s Q3 earnings release on 30 July.

Overall, analysts are positive about Skyworks’ prospects. The median price target of $115 among analysts polled by LSEG implies gains of 18.19% over the next 12 months. The high target of $140 suggests the stock could climb 43.88% in that time.

Bear Case for Skyworks

However, concerns over the near-term prospects for Skyworks have dampened some analysts’ optimism.

The company’s potential headwinds go beyond Apple. On October 10, Barclays followed up with another research note that directly addressed Skyworks, noting that the outlook for Android products in China is challenging in the near term. Barclays downgraded Skyworks from ‘equal weight’ to ‘underweight’ and lowered its price target for Skyworks stock from $115 to $87.

This is one of the lowest targets among analysts polled by LSEG — the lowest of which envisages the stock falling 14.7% to $83.

The biggest concern may be that Skyworks’ revenue fell in 2023 and appears on track to do so again in 2024. The company will need to reverse this trend if it is to sustain analyst optimism.

Conclusion

While Skyworks’ recent share price declines could present a buying opportunity if the theorized boom in demand for AI smartphones materializes, there is significant risk associated with the stock, especially given its recent revenue performance.

Investors should conduct thorough research and consider the risks before taking any investment decision.