Why This 5G Stock Can Burst Higher This Earnings Season

Skyworks Solutions (NASDAQ: SWKS) has turned up the heat in recent quarters as booming sales of 5G smartphones and the success of Apple's (NASDAQ: AAPL) iPhone 12 series has led to sharp growth in the company's revenue and earnings.

The chipmaker started fiscal 2021 on a high thanks to these tailwinds. Not surprisingly, Skyworks stock has done well so far in 2021 despite facing a bout of volatility. However, shares of the semiconductor specialist have pulled back this month for no visible reason.

This could be a chance for savvy investors to buy more Skyworks stock at an attractive valuation, as it could take off after the release of its second-quarter results on Thursday, April 29. Let's see why that may be the case.

SWKS Chart

SWKS data by YCharts

Skyworks Solutions looks set to beat expectations

Skyworks Solutions has already set a high bar for the second quarter of fiscal 2021. The company expects to deliver $2.34 per share in adjusted earnings on revenue between $1.125 billion and $1.175 billion. Skyworks' revenue would increase 50% year over year at the midpoint of the guidance range, while adjusted earnings are on track to spike an impressive 75%.

Skyworks Solutions could surpass its expectations and deliver stronger Q2 numbers. Apple -- Skyworks' largest customer, which produced 56% of its sales last fiscal year -- is one reason why that may be the case. Skyworks is supplying multiple radio-frequency chips for use in the iPhone 12 lineup, and that's going to create a massive tailwind for the company given the popularity of Apple's new phones.

Person holding a smartphone with the word

Image source: Getty Images.

The iPhone 12 models have been setting the sales chart on fire ever since they were launched late last year, encouraging Apple to raise production. Supply chain checks indicate that Apple could have made around 60 million iPhones in the first quarter of 2021, driven by a sales "supercycle." Strategy Analytics estimates that Apple sold 57 million iPhones last quarter, an increase of 44% over the prior-year period.

A jump in iPhone sales volumes, and the fact that Skyworks should be getting more revenue from each unit of Apple's new devices thanks to the higher cost of components of 5G smartphones, should pave the way for revenue and earnings beats. But this is not the only catalyst to watch out for.

Skyworks' revenue from the non-mobile business (formally known as the broad markets segment) spiked 35% year over year in the first quarter. Though this segment accounts for 22% of the company's total revenue, it is showing signs of moving the needle in a bigger way in the long run. That's because the broad markets business stands to gain from a fast-growing technology trend in the form of the Internet of Things.

Skyworks is targeting wireless connectivity applications such as Wi-Fi 6 devices, automotive, healthcare, and audio solutions, among others. The company has found success in these areas as the rapid growth of the broad markets business shows us. It has also built a wide customer base including the likes of Cisco Systems, Netgear, Alphabet's Fitbit, Volkswagen, and Toyota, to name a few.

Solid guidance is in the cards

Wall Street expects Skyworks to deliver third-quarter revenue of $1.07 billion and adjusted earnings of $2.10 per share. That would translate into 45% year-over-year sales growth and a 68% rise in adjusted earnings. This is already impressive, but Skyworks can deliver better guidance considering the developments that are reportedly taking place at its largest customer.

Apple supplier Taiwan Semiconductor Manufacturing is reportedly planning to start the production of the chip that will go into this year's iPhone lineup next month. For comparison, the iPhone 12's A14 chip hit the production lines in June last year. Additionally, Apple is expected to produce 25% more units of this year's iPhone models as compared to 80 million units of the iPhone 12 produced in 2020.

If true, such a development could pave the way for strong guidance from Skyworks for the rest of the year. Analysts expect the chipmaker to end the fiscal year with 46% revenue growth and a 67% jump in earnings, and the sustained success of its largest customer in the 5G smartphone market could make that possible.

All of this points to why it would be a good idea to buy Skyworks stock right now. Shares of the chipmaker trade at less than 29 times trailing earnings and at 20 times forward earnings, which is attractive considering the massive growth it is delivering. However, Skyworks may not be available at this relatively attractive valuation if the stock takes off after the company's next set of results, which is why investors looking to add a fast-growing 5G play to their portfolio should consider acting before the earnings report.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, Skyworks Solutions, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: long March 2023 $120.0 calls on Apple and short March 2023 $130.0 calls on Apple. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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