Skyworks Solutions, Inc.

+2.04 (+1.78%)
: $115.97 -0.39 (-0.34%)
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Why Skyworks Solutions is Absolutely Crushing It



Skyworks Solutions is a chip maker with heavy in roads to the wireless world. One of the most prevalent themes in technology today surrounds radio frequency (RF) complexity and content. Both Avago (AVGO) and Skyworks (SWKS) have proven to be leaders and many considered both to be the best diversified plays in this realm.

The iPhone 6s (or whatever the iPhone 6 upgrade will be called) represents a giant opportunity for SWKS as does the 4G reference design share with China's major baseband suppliers. You can read our recent article on Avago here: Why Avago May Be the Most Compelling Stock in All of Technology.

An equally strong statement could be made surrounding SWKS. In fact, if we scan all technology firms of all market caps in North America, SWKS has the second strongest fundamentals of all of them, with only Apple out performing the company. Here's a snippet of the scan.

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The company's fundamentals are extremely strong, as it benefits form the Internet of Things (IoT) and its strangle hold on wireless. Revenue is trending higher with new all-time highs realized for more than 20 consecutive quarters. Earnings are at all-time highs and have broken new highs for 15 consecutive quarters (TTM) even as R&D expense has broken new all-time highs for six consecutive quarters. The firm is a powerhouse in technology and is one of the most compelling stories in the entire segment.

Technicals   |   Support: 92.25   |   Resistance: 110.28   

Golden Cross Alert:
The 50-day MA is now above the 200-day MA.
Swing Golden Cross Alert: The short-term 10 day MA is now above the 50 day MA.

SWKS's -4.67% drop today has a material impact on its technical outlook.

SWKS has a two bull (low rated) technical rating because it's trading below both its 10-day (short-term) and its 50-day (medium-term) moving averages. We do note that the stock is trading above the long-term 200-day moving average.

Here are the consensus estimates for next quarter. Note that last quarter's actual result is included at the far right.
Earnings Date EPS Revenue (Mean) Revenue (Median) Last Quarter (Actual)
2015-07-16 $1.17 $861.0 M $858.9 M $762.1 M Provided by ZACKS

Let's look at the core elements that drive the company's fundamental rating.

Fundamentals Rating Summary

Revenue (TTM US$ Millions) 2,873 1,899 1,689

Operating Margin (QTR) 1.408 1.27 1.21 RISING

Net Income (TTM US$ Millions) 648 321 239

Levered Free Cash Flow (TTM US$ Millions) 411 361 110 RISING

Research and Development (US$ Millions) 76 62 56

Research and Development Expense/Revenue 0.099 0.128 0.132 FALLING

Stock Returns and Chart

SWKS is down -1.0% over the last three months and up +35.0% over the last six months. The stock price is up +102.2% over the last year.

Before we dig into the fundamental trends that drive the rating, let's look at a two-year stock chart with regression channel and 10-day momentum (on the bottom).
Click here to interact with this stock chart

Now let's examine the visualizations of the critical financial measures.

Revenue (TTM US$ Millions) 2,8731,8991,689

Revenue (TTM) has increased for at least five consecutive quarters which triggers a "trend" (in this case 20= quarters). SWKS is not only growing revenue by 51% year-over-year, but its 5 star (fundamental) rating implies that the revenue acceleration is pushing the core fundamentals of the company forward. While massive revenue growth often times comes at the expense of earnings, free cash flow and operating margins, that is not at all the case for SWKS. The future is yet more promising with the added complexity of RF becoming a central theme in technology moving forward.

What do all these numbers mean?
SWKS's fundamental rating benefited these results:
1. The one-year change was positive.
2. The one-year change was greater than +20% (an extra boost to the rating).
3. The two-year change was positive.
Finally, the five+ consecutive quarters of an upward trend in revenue benefited the fundamental (star) rating.

Let's look at Revenue (TTM US$ Millions) in the chart below.

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Operating Revenues/Operating Expense 1.4081.271.21RISING

This ratio (which simply represents how much revenue is generated per one dollar of expense) must be at a minimum above 1.0 in order for a company to turn an operating profit. For the latest quarter SWKS showed a ratio of 1.41, which in English means the company generates $1.41 of operating revenue for every $1 in operating expense. For reference, that's better than Facebook. Operating margins are at their second highest level ever for the firm, with the all-time high reached last quarter. When we see revenue growing so quickly, we rarely see margins also increasing because revenue growth often times comes with substantial costs.

What do all these numbers mean?
A year ago Operating Revenues/Operating Expense was 1.27. In the last year we can see operating margins are increasing and are also currently greater than 1.0 (the critical level).

SWKS's fundamental rating was affected from the operating margin numbers in two ways:
1. The current value is above 1.0 (the firm generates an operating profit).
2. The one-year change was positive (raises the rating).

Let's look at Operating Revenues/Operating Expense in the chart below with the total assets in the orange line.

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Net Income (TTM US$ Millions) 648321239

If revenue is breaking new highs and operating margins are higher, we have (nearly) a tautology that net income must also be rising. Net Income (after tax profit) over the trailing twelve months (TTM) for SWKS has risen for 12 consecutive quarters and now stands at an all-time high of $648 million. The company has seen net income (TTM) rise 102% year-over-year.

In our next chart we plot Net Income (TTM US$ Millions) in the blue bars and the quarterly results in the gold line. Note the rising bars from a year ago (four quarters ago).

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Research and Development (US$ Millions) 766256

With earnings and margins increasing so rapidly, we almost have to believe that cost cutting is happening somewhere. But, in fact, Research and Development (R&D) (US$ Millions) is trending higher for SWKS as well, meaning that for at least five consecutive quarters, it's been rising. In fact, R&D not only stands at an all-time high, but it's up 23% year-over-year and 34% over the last two-years. As long as this R&D expense is on the right track, SWKS is actually making itself stronger for the future while at the same time pumping out record high earnings.

In our final time series chart we plot Research and Development (US$ Millions) in the blue bars and R&D per dollar of revenue in the gold line.

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The bullish thesis for SWKS is quite simple. The company is breaking all-time highs in revenue and has done so for five consecutive years while operating margins are improving and net income is also at all-time highs. At the same time R&D is growing rapidly, which means the firm is strengthening its position moving forward yet somehow improving margins at the same time. The increased complexity and content of the RF segment has been earmarked as a major investment theme for several years to come as a major piece of the Internet of Things (IoT) realm. While growth can never be guaranteed and an economic downturn in China would hurt the firm, for now, SWKS is doing extremely well and has the looks of a firm that will continue to do so for quite some time.