Skyworks Stock: 2 Reasons It’s Not A Buy Yet (NASDAQ:SWKS)

We downgraded Skyworks Solutions (NASDAQ:SWKS) to a hold in mid-August last year, and we continue to be hold-rated on the stock heading into the back end of the year, with possible recovery in 2025 but a muted near-term outlook. The stock is down 3% since our downgrade, while the S&P 500 is up ~26%. We’re less optimistic about SWKS into its September quarter based on two factors we’re seeing for 2H24: the first is content loss at Apple and continued muted smartphone end demand, and the second is the lack of material growth in SWKS’ non-iPhone revenue and design wins. We think these two factors will weigh on SWKS’ top-line growth in the second half of the year. We don’t see SWKS outperforming the S&P 500 in the near term and would, in turn, recommend investors stay on the sidelines.

SWKS reported total sales down 13% Q/Q to $905.5M this quarter, in line with consensus of $900.4M on weaker mobile sales down 21% Q/Q to $550M and sales to Apple in specific down 17% Q/Q and 14% Y/Y to $588.6M from the same time last year ahead. Now, management is guiding for its September quarter sales to grow 10-15% Q/Q to $1,000M to $1,040M, again in line with consensus at $1,010M. What we need to zoom in on is management’s commentary and outlook for its mobile sales. We can consider those to be SWKS’ bread and butter, i.e., mobile sales growth will re-accelerate top-line growth for SWKS. The first factor that makes us less positive about SWKS in the near term is that it is unlikely the company can materially outperform without a mobile sales recovery and, more importantly, with content loss at Apple.

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

We don’t see any other content gains that could offset this in the near-term or that could instigate an end demand recovery, and neither does management. In fact, management is guiding mobile sales to grow 20% Q/Q and decline 16.5% Y/Y next quarter, which is lower than the typical season growth for the fourth quarter, and the reason is content loss at Apple.

Now we switch to the second factor we mentioned: SWKS’ other stream of revenue, broad-market sales, being unable to support near-term outperformance, in our opinion. SWKS’ broad market sales grew 1% Q/Q to $355M this quarter; for reference, these sales are made up for consumer IoT, communications, and data center-related end markets, which saw some recovery but definitely not enough to outperform Wall Street expectations for the stock due to continued weakness from industrial and auto end markets. Management gracefully reminded us on the earnings call that “we did call out broad markets at the bottom in the December quarter,” and while we have seen two sequential quarters of growth, we don’t think there is enough momentum for broad market sales to support outperformance. Management confirms this with their more guarded outlook on broad market sales, expecting modest Q/Q growth for 4Q24.

The following chart outlines SWKS’ in-line results and guidance for 3Q24, further confirming the end demand limbo at the back end of the year.

Valuation & Word on Wall Street

SWKS is relatively cheap, especially after the upward revision in tech stock multiples since the AI boom. On a P/E basis, the stock is trading at 16.2x C2024, compared to a group average of 30.1x and a ratio of 11.1x back when we last wrote about the stock in November. The stock also trades at what seems to be a discount on an EV/Sales ratio compared to the peer group; the stock trades 4.1x C2024 versus the peer group’s average of 7.6x and a previous average of 3.2x. We know SWKS’ multiples have expanded since our November note last year, but we don’t think that’s too concerning considering the upward revision of the peer group average and SWKS’s relatively cheap status. We understand that SWKS’ valuation is attractive, but we don’t think the stock provides a positive risk-reward profile in the near-term. The following chart outlines SWKS’ valuation against 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 are buy-rated, 20 are hold-rated, and the remaining two are sell-rated. This comes in contrast to last November, during which of the 31 analysts covering the stock, 12 were buy-rated, 17 were hold-rated, and the remaining were sell-rated. We think Wall Street’s sentiment has shifted to the more negative side considering the lack of signs of end market recovery for smartphone demand this year, coupled with a correction on industrial and auto fronts spilling into 2H24.

Sell-side price targets’ upside is also more limited than it was in November. The median and mean sell-side price targets are both set at $115 for a potential 13% upside, compared to a potential upside of 11-16% in November.

The following charts outline SWKS’ sell-side ratings and price-targets.

What to do with the stock?

We remain hold-rated on SWKS on two factors when it really comes down to it: 1. Content loss at Apple headwind, and 2. Mixed end market outlook for broad market businesses. Management also pitched the AI growth element on the call as a potential catalyst to reverse the mixed near-term outlook, stating the following: “We’re just beginning to now engage in AI, and we see that in the phone. We definitely see that as a major, major catalyst for smartphones.” We’re not convinced that AI will be much of a catalyst in 2H24 as far as SWKS is concerned. We think this could be more of a longer-term tailwind, but we don’t see AI triggering a smartphone end-demand recovery ahead of 2025. We like that SWKS management is steadily working to reduce inventory on hand and boost sequential growth on mobile and broad market fronts, with internal inventory down for six consecutive quarters. However, we think investors are better positioned on the sidelines for the near-term.