Generative AI And Advanced RF Tech Set To Drive Smartphone Evolution And Revenue Growth

Key Takeaways

• Anticipation of generative AI in smartphones could increase demand for advanced RF technology, enhancing Skyworks Solutions' revenue potential.
  
• Expansion into automotive and industrial sectors with design wins for connected cars and EVs suggests significant growth opportunities.
  
• High inventory levels and supply chain uncertainties, alongside intense competition in smartphones, may hinder Skyworks Solutions' revenue growth and market expansion efforts.

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.

• The anticipation of generative AI sparking a significant smartphone replacement cycle can drive higher levels of RF complexity, potentially leading to increased revenue as newer AI features in smartphones necessitate advanced RF technology.
  
• Growing demand in edge IoT for WiFi 7 systems due to their faster data transfer speeds and lower latency predicts a healthy upgrade cycle, which could enhance revenue from the sale of Skyworks' design wins in this space.
  
• The expected recovery in inventory levels for traditional data center and wireless infrastructure once industry conditions stabilize can lead to increased orders for Skyworks' products, thereby improving revenue as customers replenish their inventory to normal levels.
  
• Skyworks Solutions' expansion in the automotive and industrial sectors, given their design win pipeline for connected cars and EV markets, suggests potential growth in revenue from these sectors as inventory levels stabilize and demand increases.
  
• Investments in high-performance timing solutions targeting 800 gig and 1.6 terabit Ethernet switches in optical modules for next-generation data centers could boost revenue as complex workloads for large language models propel upgrade cycles.

Assumptions

• Analysts are assuming Skyworks Solutions's revenue will grow by 3.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 17.8% today to 22.9% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $6.38) by about August 2027, up from $780.3 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $757 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.1x on those 2027 earnings, up from 21.0x today. This future PE is lower than the current PE for the US Semiconductor industry at 25.1x.
• Analysts expect the number of shares outstanding to grow by 0.2% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.12%, as per the Simply Wall St company report.

Risks

• Elevated inventory levels in traditional data center and wireless infrastructure are prolonging the industry's recovery, which could delay revenue growth from these sectors.
  
• In the automotive and industrial segments, the company is still working through excess inventory levels despite seeing signs of stabilization, suggesting potential short-term revenue challenges in these markets.
  
• The reliance on the smartphone market, particularly the anticipation of a generative AI-driven replacement cycle, introduces a risk if this cycle does not materialize as expected or faces delays, potentially impacting revenues and earnings.
  
• The competition in Android smartphones, where Skyworks is looking to increase its presence, is intense. Any failure to secure key design wins or to significantly increase content in these devices could limit revenue growth opportunities.
  
• Ongoing global supply chain uncertainties and geopolitical tensions, especially related to manufacturing and supply chains in China, could impact the company's ability to meet demand, affecting revenue and margins.

Valuation

• The analysts have a consensus price target of $115.13 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 $140.0, and the most bearish reporting a price target of just $83.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $4.8 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 21.1x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of $102.78, the analyst's price target of $115.13 is 10.7% higher.
  
• 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.