Emerging Automotive And IoT Markets Will Drive Future RF Demand

Key Takeaways

• Growth in automotive RF content and new product cycles in various sectors is expected to enhance revenue and net margins.
  
• A stock repurchase program could significantly boost earnings per share, potentially increasing shareholder value.
  
• Leadership changes, revenue dependency on key customers, and market competition pose significant risks to future revenue, margins, and strategic direction.

Catalysts

Designs, develops, manufactures, and markets proprietary semiconductor products in the United States, China, South Korea, Taiwan, Europe, the Middle East, Africa, and the rest of Asia-Pacific.

• Skyworks Solutions is experiencing growth in RF content per vehicle in the automotive sector, driven by advancements in 5G cellular, WiFi, Bluetooth, and V2X, which is expected to positively impact revenue as design wins convert into earnings.
  
• The company anticipates long-term growth driven by new product cycles in automotive, electrification, Edge IoT, and AI data centers, suggesting potential revenue enhancement and positive impacts on net margins from diversified income streams.
  
• The shift toward higher complexity RF solutions due to the adoption of WiFi 6E and 7 systems, which facilitate increased data throughput and RF complexity, is expected to drive demand and improve revenue growth prospects.
  
• Skyworks is positioned for a multiyear upgrade cycle in wireless markets, including sectors like wireless gaming, home audio, and headsets, which suggests a potential increase in revenue and net margins from high-performance connectivity products.
  
• The company has announced a $2 billion stock repurchase program as part of its capital allocation strategy, which could lead to significant earnings per share (EPS) growth through share reduction, thereby potentially increasing shareholder value.

Skyworks Solutions Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Skyworks Solutions's revenue will decrease by 0.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.0% today to 15.0% in 3 years time.
• Analysts expect earnings to reach $597.4 million (and earnings per share of $3.81) by about March 2028, up from $526.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $684.0 million in earnings, and the most bearish expecting $315 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.6x on those 2028 earnings, up from 20.8x today. This future PE is lower than the current PE for the US Semiconductor industry at 26.8x.
• Analysts expect the number of shares outstanding to grow by 0.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.85%, as per the Simply Wall St company report.

Skyworks Solutions Future Earnings Per Share Growth

Risks

• The announcement of a leadership transition with a new CEO could introduce uncertainty in strategic direction and execution, potentially impacting earnings and net margins.
  
• The decline in content share with their largest customer, resulting in a revenue drop of 20% to 25%, poses significant risk to future revenue, especially impacting Q4 fiscal '25 and fiscal '26.
  
• Persistent inventory challenges and muted demand in industrial and infrastructure markets continue to be headwinds, which could affect overall revenue growth and gross margins.
  
• Intensified competition in the RF solutions market, including dual-sourcing strategies by major customers, threatens to impact Skyworks' market share and future revenue opportunities.
  
• Underutilization in factories due to revenue challenges may lead to prolonged pressures on gross margins, affecting overall profitability.

Valuation

• The analysts have a consensus price target of $70.662 for Skyworks Solutions based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $100.0, and the most bearish reporting a price target of just $55.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.0 billion, earnings will come to $597.4 million, and it would be trading on a PE ratio of 24.6x, assuming you use a discount rate of 8.9%.
• Given the current share price of $68.22, the analyst price target of $70.66 is 3.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.