Two chip companies that you might have heard of are Skyworks Solutions (NASDAQ: SWKS) and Cypress Semiconductor (NASDAQ: CY). They take different paths toward similar goals.
Skyworks builds wireless chips that, today, primarily go into smartphones. Smartphones should continue to play an important part in Skyworks' future, especially as the transition to 5G wireless drives up the value of the chips that Skyworks sells to its smartphone customers, but the company is also looking to diversify into automotive and other Internet of Things (IoT) markets, too.
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Meanwhile, Cypress makes most of its revenue from sales of chips into the Internet of Things (IoT) as well as the automotive market and is counting on those segments to deliver long-term growth for its shareholders as its so-called legacy businesses continue to decline.
So which of these two stocks is the better bet? It depends on what you're interested in.
Comparing the investment theses
Skyworks is an attractive company because it benefits from two key megatrends. The first is that wireless technology continues to become more complex over time, which leads to an increase in the amount of dollar content per device that Skyworks enjoys. As the company highlighted in a recent investor presentation, the transitions from various cellular standards have historically yielded large increases in such dollar content.
Indeed, according to the company, a typical 3G smartphone had about $8 of Skyworks content, a figure that grew to $18 for a 4G smartphone. The company claims that number is set to rise again to $25 for a typical 5G smartphone. What this means is that even in a world in which smartphone unit volumes stay roughly flat or even decline, Skyworks can still post revenue (and, most likely, profit) increases.
The second part of the Skyworks investment thesis is that more things are going to require wireless connectivity, which broadens the total addressable market (TAM) for its chips. Skyworks has cited applications such as connected cars, smart cities, and industrial IoT as potential opportunities for its products.
What's interesting is that Cypress' investment thesis isn't so different. Cypress does sell wireless chips -- it sells Wi-Fi/Bluetooth combination chips for automotive and IoT applications -- but also core to its business are microcontrollers, wired connectivity chips (e.g., USB-C), and a specialized kind of memory known as NOR flash that the company claims is critical to advanced driver-assistance systems (ADAS).
The similarities don't end there, either. A key part of the growth story that Cypress highlighted at its analyst day is an increase in the dollar content in the various devices that it powers. For example, the company claims that in the future, a typical vehicle will go from having about $11 worth of wireless chip content to $33.
Skyworks and Cypress do differ in some important ways. For example, Skyworks expects its core smartphone chip business to grow -- automotive and IoT are simply incremental opportunities. For Cypress, automotive and IoT are its core business, and the company expects these segments to grow at 8% to 12% and 12% to 14% compound annual growth rates, respectively.
So Cypress is more of a "pure play" automotive and IoT chip company, while Skyworks is a smartphone chip company that's actively pursuing new markets.
Moreover, while Skyworks' business is highly dependent on a single customer -- Apple made up 47% of its revenue during its most recent fiscal year -- Cypress' customer base is significantly more diverse. In fact, according to its most recent 10-K filing, 18% and 14% of its revenue came from two distributors, but those distributors presumably sold that product through to a relatively broad range of customers and applications.
Another difference is in valuation. Cypress trades at a little over 14 times the earnings per share (EPS) that analysts expect the company to generate in fiscal 2019 and about 12.6 times their fiscal 2020 estimates. Skyworks is slightly cheaper at just under 12.7 times expected fiscal 2019 EPS and a little over 11.3 times expected fiscal 2020 EPS.
If you're interested in investing in a more pure-play IoT and automotive chip company, Cypress Semiconductor might be the better bet. However, if you're interested in owning a company with high exposure to the mature smartphone market (albeit with a compelling per-device content growth story) that is also bringing its core technology to the automotive and IoT markets, then Skyworks might be more up your alley.
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Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends AAPL and Skyworks Solutions. The Motley Fool has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. The Motley Fool recommends Cypress Semiconductor. The Motley Fool has a disclosure policy.