We are the wireless player Skyworks Solutions, Inc.NASDAQ: SWKS) to evaluate the purchase. We were previously bullish on SWKS and Qorvo (QRVO), as we expected a surge in demand in the smartphone market. put pressure on both companies. Our expectations of macroeconomic developments and inflationary pressures play into the smartphone market. We are now bullish on SWKS as we believe the stock is now priced at most of the demand in the smartphone market. Therefore, we rate SWKS to buy based on our belief that SWKS is better positioned to outperform expectations and peer group in 2023.
We expect that the company will see demand back in 2023 from the growth of content in the 5G and Wi-Fi markets. SWKS’s largest customer, Apple Inc. (AAPL), is upgrading to 5G on its iPhone product lines, and we expect SWKS to take advantage of 5G demand as a leading RF supplier.
YTD, the stock is down almost 45%. We still expect that near-term macro-economic events can move the stock price. However, despite the downturn, SWKS reported 4Q22 earnings of $1.41B, representing 7.6% Y/Y growth. We believe SWKS provides an attractive entry point at current levels and expect the company to grow meaningfully in 2023.
Content Growth in 5G and Wifi Markets
To quickly explain, SWKS designs and manufactures semiconductor equipment for front modules and radio frequency systems. SWKS derives its revenue from two segments: mobile and broad (automotive, industrial, Internet of Things (IoT), Infrastructure, and Voice and Cognitive Gaming). The graph below shows SWKS revenue across mobile and broader markets.
We previously weighed in on the stock due to a global decline in smartphone shipments that are expected to decline by 6.5% in 2022. We now believe that the weakness of the smartphone has mostly been priced into the stock. We are more bullish on SWKS in 2023, as we expect tailwinds in demand from continued content growth in the 5G and Wifi markets. The following describes what we expect to be the growth drivers for SWKS in 2023.
- The mobile segment has increased content growth
We expect SWKS to receive strong demand from its largest customer, Apple, from 5G, which will contribute almost 56% of total revenue in 2021. We believe SWKS is well positioned to benefit from AAPL’s 5G upgrade cycle as it remains the company’s primary strategic RF supplier for the foreseeable future. AAPL and SWKS customer Samsung ( SSNLF , SSNNF ) is facing increasing pressure to roll out upgrades to support 5G in India. Many nations are still expanding their 5G broadband infrastructure, and we expect this to create more demand for the SWKS mobile segment. We believe SWKS’s customer base makes it better positioned than its peer group to benefit from demand tailwinds from 5G and Wifi going forward.
- Developments in the EV market in China.
In the panel market segment, we expect SWKS to benefit from the growth of China’s electric vehicle (“EV”) market on the MediaTek (TPE: 2454) platform. MediaTek uses SWKS RF expertise for its 5G platforms. Among its other businesses, MediaTek provides automotive solutions at the edge of the automotive segment: inter-vehicle communication systems, in-vehicle information systems (IVI), Vision Advanced Driver Assistance Systems (V-ADAS), and mmWave radar solutions. .
We expect SWKS to be able to take advantage of EV demand in China with its MediaTek platforms as the automotive sector slowly adopts 5G connectivity. China’s consumers are showing a faster adoption of EVs than other countries. We expect the tailwind in the EV market to reflect the tailwind in the wider SWKS market segment, which accounts for 36% of total revenue.
The graph below shows the annual sales volume of EVs in China.
SWKS is relatively cheap, trading at 8.7x C2023 EPS of $10.22 on a P/E basis compared to the peer group average at 17.4x. On the EV/Sales metric, SWKS is trading at 3.0x C2023 versus the peer group average of 4.1x. We expect SWKS to break out of the peer group in 2023 and recommend investors buy the stock at current levels.
The following chart shows the value of SWKS according to its peer group.
Word on Wall Street
Wall Street is divided in its evaluations of SWKS. Of the 30 analysts covering the stock, 15 have a buy rating, 14 have a hold rating, and the rest have a sell rating. SWKS is trading at $89. Average and median price targets are set at $105 and $108, respectively, with upside potential of 18-21%.
The chart below shows sales rates and price targets.
What’s in stock?
We rate SWKS as a buy, as we expect the company to outperform peers and expectations in 5G adoption on the mobile and automotive fronts due to its unique customer base and demand tails. We believe that the 45% drop YTD creates an attractive entry point into Skyworks Solutions, Inc.’s 2023 growth.