Major Internet Upgrade Could Trigger a 20% Rally in This Stock

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For Internet surfers, it's time to move on to the Autobahn. A new flavor of Wi-Fi will be hitting store shelves in coming quarters that will make today's Wi-Fi equipment seem downright pokey. That new speed goes by the ungainly name of 802.11ac, but all you need to know is that the days of congested networks in your home or office are about to end.

Consider these numbers: Your current Wi-Fi standard, known as 802.11n is capable of transmitting data at around 150 megabits per second (mbps), or up to 450 mbps if the router has three antennas. The 802.11ac is three times faster, meaning it can transmit up to 1.3 gigabytes per second if three antennas are used. Even with just one antenna, the 450 mbps speed is fast enough to deliver multiple streams of high-definition video without delays.

In the past few months, a handful of tablet, laptop and smartphone makers have placed these 802.11ac chips into their gear, but as we move ahead, we can expect this technology to become ubiquitous.

My favorite stock for the Wi-Fi upgrade is Skyworks Solutions (SWKS). It's a stock that has largely been out of favor, thanks to concerns of slowing growth at its top customer, Apple (AAPL). SWKS shares have fallen 20% in the past 12 months while the S&P 500 has gained 25%. But investors will soon see that this chipmaker is about so much more than Apple.

Investors got a clear read on Skyworks' intention to become a major player in 802.11ac back in February at the annual Barcelona Mobile conference, though the impact of this new technology has thus far had a muted impact on the company's income statement. Yet the number of design wins SWKS is compiling should help grow investor interest this summer.

Those design wins are stemming from a move to deliver more functions on fewer chips, helping smartphone and tablet makers to design ever smaller products that easily fit into a pocket or a backpack. For Skyworks, that trend should help fatten the bottom line.

Analysts at D.A. Davidson, which carries a $35 price target on the stock, said, "The company noted that margins are expanding as it begins to transition to a richer product mix, including more integrated solutions that have limited competition."

The ability to deliver a broad range of needs -- Wi-Fi signals, GPS, display, wireless network communications and many others -- appears to be paying off, as customers such as Apple, Samsung, Lenovo and Huawei take advantage of the Skyworks's SkyOne development tools early in the design process.

Despite this design-win momentum, shares continue to languish near their 52-week lows. Support for this stock re-emerges whenever it has moved into the $20 area.

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The key catalyst for this stock is next month's quarterly earnings release, scheduled for July 15, at which time management is expected to speak about how those design wins are turning into sales growth, especially as 802.11ac and other technologies gain steam.

Look for sales guidance for the September quarter of around $470 million, which will likely represent roughly 10% sequential growth from the current quarter. Sales in the June quarter are being dampened a bit by a slowdown in Apple's iPhone sales. With a new iPhone expected in the December quarter, Skyworks looks well-positioned to deliver further sequential growth in that quarter as well.

This stock looks quite cheap, trading at around 8.5 times projected 2014 profits, as Skyworks enters into a more robust growth phase in coming quarters.

I ultimately see shares rising into the low $30s, with roughly half of that move coming this summer as investors warm up to this steady growth story.

Recommended Trade Setup:

-- Buy SWKS up to $23
-- Set stop-loss at $19
-- Set initial price target at $27.50 for a potential 20% gain in three months

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