Skyworks Stock: Two Reasons It's Not a Good Buy Yet (NASDAQ:SWKS)

We have downgraded Skyworks Solutions (NASDAQ: SWKS) to a Hold in mid-August last year, and we continue to maintain a Hold rating on the stock through year-end, with a possible recovery in 2025 but a moderate near-term outlook. Outlook. The stock is down 3% since our downgrade, while the S&P 500 is up about 26%. We are less optimistic about SWKS in its September quarter based on two factors we are watching for the second half of 2024: the first is the loss of content at Apple and continued subdued smartphone demand, and the second is the lack of material growth in SWKS' non-iPhone revenue and design achievements. We believe these two factors will weigh on SWKS' revenue growth in the second half of the year. We do not believe SWKS will outperform the S&P 500 in the near term, and in turn, we would recommend investors to stay on the sidelines.

SWKS reported that total sales fell 13% quarter-on-quarter to $905.5 million This quarterSWKS reported that its mobile sales were down 21% QoQ and 14% YoY from the same period last year, in line with consensus of $900.4 million on weaker mobile sales which were down 21% QoQ to $550 million and Apple-specific sales which were down 17% QoQ and 14% YoY to $588.6 million from the same period last year. Now, management is guiding for its September quarter sales to grow 10-15% QoQ to $1.00 billion to $1.04 billion, again in line with consensus of $1.01 billion. What we need to focus on is management’s commentary and outlook for its mobile sales. We can consider them as the bread and butter of SWKS, i.e. mobile sales growth will again accelerate SWKS’ revenue growth. first The factor that makes us less positive on SWKS in the near term is that the company is unlikely to be able to substantially outperform without a recovery in mobile sales and, more importantly, with the loss of content at Apple.

We specify Apple here because it accounts for a sizable double-digit percentage of SWKS’ total sales, at 65% of total sales, and Qualcomm (QCOM) and Qorvo (QRVO) have similar exposure to Apple as their largest customer. We believe SWKS has an Apple-related headwind to contend with. On last quarter’s earnings call, SWKS management noted, “We expect content-related headwinds in the next cycle” due to the loss of content with its largest customer, Apple. The Apple content-related headwind is something SWKS faces on its own, while QRVO does not; Seeking Alpha’s news update on SWKS and QCOM’s results states, “Qorvo provided improved September outlook on share gains in the upcoming IP16 versus SWKS’ dollar content loss this year.”

We don't see any other content gains that could offset this in the near term or instigate a recovery in end demand, and neither does management. In fact, management is guiding mobile sales to grow 20% QoQ and decline 16.5% YoY next quarter, which is lower than typical seasonal growth for Q4, and the reason is the loss of content at Apple.

Now we move on to the second Factor we mentioned: SWKS’ other revenue stream, broad market sales, cannot sustain near-term outperformance, in our view. SWKS’ broad market sales grew 1% QoQ to $355 million this quarter; for reference, these sales are offset by consumer IoT, communications, and data center-related end markets, which saw some recovery, but definitely not enough to beat Wall Street expectations for the stock due to continued weakness in the industrial and automotive end markets. Management nicely reminded us on the earnings call that “we forecast broad markets were at the bottom in the December quarter,” and while we’ve seen two consecutive quarters of growth, we don’t think there’s enough momentum for broad market sales to support outperformance. Management confirms this with its more cautious outlook on broad market sales, expecting modest QoQ growth for Q4 2024.

The chart below outlines SWKS' Q3 2024 online results and guidance, further confirming the limbo in final demand at the end of the year.

Rating and opinion on Wall Street

SWKS is relatively cheap, especially after the upward revision to tech stock multiples since the rise of AI. On a P/E basis, the stock is trading at 16.2x C2024, compared to a peer group average of 30.1x and a trailing edge ratio of 11.1x when we last wrote about the stock in November. The stock is also trading at what appears to be a discount on an EV/Sales ratio compared to the peer group; the stock is trading at 4.1x C2024 versus the peer group average of 7.6x and a prior average of 3.2x. We know SWKS’ multiples have expanded since our November note of last year, but we don’t think that’s too concerning considering the upward revision to the peer group average and SWKS’s relatively cheap status. We understand that SWKS is valued attractively, but we do not believe that the stock provides a positive risk-reward profile in the near term. The chart below outlines SWKS's valuation versus the peer group.

Wall Street shares our cautious outlook on the stock more than it did last November. Eight of the 30 analysts covering the stock have a buy rating, 20 a hold and the remaining two a sell. This is in contrast to last November, during which, of the 31 analysts covering the stock, 12 had a buy rating, 17 a hold and the remaining a sell. We believe Wall Street sentiment has turned to the more negative side considering the lack of signs of end-market recovery for smartphone demand this year, coupled with a correction on the industrial and automotive fronts that will extend into the second half of 2024.

The upside potential of sell-side target prices is also more limited than in November. Median and median sell-side target prices are set at $115, which represents 13% upside potential, compared to 11-16% upside potential in November.

The following charts outline SWKS's sell-side ratings and target prices.

What to do with the stock?

We maintain our Hold recommendation on SWKS based on two factors: 1. Loss of content on Apple's headwind and 2. Mixed end-market outlook for the broad market businesses. Management also presented the AI ​​growth element on the call as a potential catalyst to reverse the mixed near-term outlook, stating, “We're just starting to get into AI, and we see it in the phone. We definitely see it as a major, very major catalyst for smartphones.” We are not convinced that AI will be a big catalyst in the second half of 2024 as far as SWKS is concerned. We think this could be more of a long-term tailwind, but we don't see AI triggering a smartphone end-demand recovery before 2025. We like that SWKS management is consistently working to reduce on-hand inventory and drive sequential growth on both the mobile and broad market fronts, with domestic inventory down for six consecutive quarters. However, we believe investors are better positioned on the sidelines in the near term.