Skyworks Solutions Inc (NASDAQ: SWKS) reported better-than-expected fiscal fourth-quarter earnings and revenues, but the stock is slipping in reaction to the year-over-year declines in both metrics.
Bank of America analyst Vivek Arya reiterated an Underperform rating and $92 price target for Skyworks shares. (See his track record here)
KeyBanc Capital Markets analyst John Vinh maintained a Sector Weight rating. (See his track record here)
BMO Capital Markets analyst Ambrish Srivastava maintained an Outperform rating and $120 price target. (See his track record here)
Canaccord Genuity analyst Michael Walkley downgraded the shares from Buy to Hold, citing valuation, but increased the price target from $82 to $102. (See his track record here)
The Theses Lower Headline Growth To Keep Valuation In Check
Notwithstanding Skyworks' execution and the coming 5G wave, Arya said top-line growth will likely recover only in the middle of next year.
The top-line growth could be very China dependent, as Skywork's largest customer Apple Inc. (NASDAQ: AAPL) is expected to have a smaller 5G ramp.
The stock is trading closer to peak valuation, the analyst noted. The stock's 19% run in the past month and bigger upside from peer Qorvo Inc (NASDAQ: QRVO) created a high bar for Skyworks' shares, heading into results.
"Even though we believe SWKS is doing well ex-Huawei (sales +20% QoQ), we view those sales as unrecoverable, and the resulting lower headline growth rate (FY20 sales up only ~0-1% YoY) will likely keep further multiple expansion in check," Ayra wrote in a note.
Stock Fully Valued At Current Levels
The slightly higher fourth-quarter results and fiscal first-quarter guidance reflected solid iPhone ramp and initial 5G adoption at various smartphone OEMs, Vinh said.
The analyst noted tremendous momentum for Skyworks at major Chinese OEMs, even as Huawei accounted for just about 1% of revenue. 5G is likely to drive meaningful content gains, the analyst added.
"Meanwhile, management is confident regarding its position in the Broad Markets segment and guided DD growth ex-Huawei for FY20," Vinh wrote.
Free Cash Flow, Buyback Render Stock Attractive Risk-Reward Prospect
Estimates for Skyworks are starting to move higher, while remaining de-risked from Huawei, Srivastava said. The analyst sees capital allocation in the form of share repurchase and free cash flow as positives, with the company delivering an analog-like free cash flow margin of 29% for the year and 40% for the quarter.
BMO raised its fiscal year 2020 and 2021 estimates modestly, giving effect to higher revenue and a slightly lower tax rate, partially offset by marginally higher opex.
"An ability to sustain a high level of FCF-sales ratio, along with a higher commitment to capital allocation, at 60-75%, with numbers reset, make for an attractive risk/reward prospect for the shares," the analyst wrote.
Growth To Outpace Broader Semi Market
Skyworks is well positioned to grow faster than the broader semiconductor market for the next several years, thanks to "more complex smartphone mix among Chinese OEMs requiring integrated RF solutions, growing IoT opportunities, and the ramping 5G market opportunities," Walkley said.
Notwithstanding shipment curbs to Huawei, which was previously a 15% customer, Skyworks' strong Broad Markets and Mobile portfolio can help improve growth and expand gross margins.
"We also believe Skyworks' diverse analog portfolio positions its Broad Market division to return to double-digit annual growth longer-term driven by content share in markets such as WiFi, wireless infrastructure, automotive, and the IoT markets," Walkley said.
The stock opened the session down more than 5%, but ticked higher during the day to trade around $100.44 per share at time of publication.
Photo credit: Raimond Spekking via Wikimedia Commons
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