This harmful tech stock is a stark buy

Skyworks Solutions (SWKS -1.27%) Affected by weak demand for smartphones in China. Shares of the chip maker plunged 10% after the release of second-quarter results for fiscal 2022 (for the three months ending April 1, 2022) on May 3.

Although Skyworks – who counts the likes apple (AAPL -3.69%)And SamsungAnd xiaomi As clients – it delivered good financial numbers for the second quarter, and its expectations were not up to the mark, leading investors to press the panic button. However, a closer look at Skyworks’ results suggests that investors may be overreacting to its guidance. Let’s see why.

Skyworks Solutions’ results weren’t that bad

Skyworks Solutions revenue increased 14% year-over-year to $1.34 billion, while adjusted earnings rose 11% to $2.63 per share. The numbers were in line with Wall Street expectations. Skyworks management attributed the double-digit increases in its top and bottom lines to increased demand for chips from major smartphone original equipment manufacturers (OEMs), as well as its efforts to diversify its customer base and reach more markets.

Skyworks’ revenue from the non-smartphone business, which it classifies as broad market revenue, was up 36% year over year from the previous quarter to $523 million. Therefore, Broad Markets produced 39% of the company’s top line in the second quarter. And the explosive growth here is no surprise, as Skyworks serves fast-growing markets such as the Internet of Things (IoT), industrial connectivity, automotive and wireless.

Image source: Getty Images.

As it turns out, Skyworks was expecting the broad market business to remain flat on a sequential basis in the last quarter, but it turned in impressive growth thanks to strong demand from the aforementioned segments. It’s also worth noting that Skyworks’ recent results were a significant improvement over its first-quarter financial results when revenue was flat and profits declined year-over-year.

However, investors ignored the positives from Skyworks’ last quarter and were concerned about the guidance. Skyworks was guided by revenue of $1.23 billion and $2.36 per share in adjusted earnings for the third quarter of the fiscal year, in the middle of its guidance range. Analysts were looking at $1.24 billion in revenue and $2.40 per share in earnings.

Skyworks is likely to lose $50 million in revenue due to supply chain disruptions and COVID-19-related shutdowns in China hurting demand, except for its stronger-than-expected revenue outlook. Market research firm IDC estimates that Chinese smartphone sales fell 14.1% in the first quarter of 2022, driven by the impact of the novel coronavirus outbreak in important cities. With China accounting for 11% of Skyworks’ total revenue, it’s no surprise to see why weakness in this market weighed on the chipmaker’s guidance.

But then, the guidelines aren’t that bad when compared to the previous year’s period. The chipmaker reported $2.15 per share in adjusted earnings over $1.12 billion in the third quarter of 2021, meaning its top and bottom lines are on track for a 10% increase each. Additionally, investors should not miss the fact that Skyworks is sitting on multiple catalysts in both smartphone and broad market businesses that can help accelerate their growth.

Investors need to look at the bigger picture

Skyworks Solutions’ 5G wireless platform is used by the top five smartphone manufacturers, which includes major devices from these companies. However, Apple is Skyworks’ biggest customer. The iPhone manufacturer generated 54% of the company’s revenue last quarter. Most importantly, Apple’s Skyworks revenue increased 20% year-over-year in the second quarter thanks to a combination of higher volumes and content gains.

This close relationship with Apple bodes well for Skyworks, with the former seeing strong growth in the era of 5G smartphones. Apple shipped 56.5 million iPhones in the first quarter of 2022, according to Canalys, an 8% increase over the same period last year. In comparison, total smartphone shipments fell 11% during the quarter. Apple’s main competitors, who are also Skyworks customers, have seen a drop in shipments.

Apple has expanded its smartphone portfolio with the addition of the iPhone SE, which could help lure money-conscious customers into the fold, and is said to be looking to introduce foldable phones in the next two years. Skyworks can expect more business from its biggest customers thanks to these new phone models. Additionally, Apple’s strong share of the 5G smartphone market could help boost iPhone shipments exponentially in the future, which should act as another tailwind for Skyworks.

Thanks to these growth drivers, buying Skyworks stock right now seems like a no-brainer, trading at just 12x consecutive dividends, a discount on Nasdaq 100A multiplier of 29. The forward earnings multiplier is 9 points towards a stronger bottom line earnings performance, something that Skyworks can sustain over the long term and become a higher growth stock.

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