What’s The Downside For Skyworks Solutions Stock?
Skyworks Solutions stock (NASDAQ: SWKS) is up 20% since the beginning of this year, and at the current price near $145 per share, we believe that Skyworks Solutions stock has around 15% potential downside.
Why is that? Our belief stems from the fact that Skyworks stock is up a strong 114% since late 2018. Further, after posting weak Q4 2020 numbers, and with rising expenses, we believe Skyworks stock could head lower. Our dashboard What Factors Drove 114% Change In Skyworks Solutions Stock Between 2018 And Now? provides the key numbers behind our thinking, and we explain more below.
Skyworks Solutions is a semiconductor manufacturer, whose products are used in radio frequency and mobile communications systems. Skyworks Solutions saw a 13% drop in revenue between 2018 and 2020, but a 7% drop in the outstanding share count meant that revenue per share dropped by just 7%.
However, Skyworks’ P/S (price-to-sales) ratio jumped from 3.1x in 2018 to 6.2x in 2019, and has further increased to 7.2x currently. But, given Skyworks’ weak Q4 ’20 performance, there is a possible downside risk for the P/S multiple.
So what’s the likely trigger and timing to this downside?
The global spread of Coronavirus has meant there is much lower demand for computing and hardware devices across all markets, which means lower semiconductor demand, and hence lower demand for Skyworks Solutions’ products. This is evident from Skyworks’ full-year 2020 results, where revenue came in at $3.35 billion, down from $3.38 billion in FY 2019. Further, rising operating expenses meant that operating margins came in lower at 26.6% vs 28.2% in 2019. This led to EPS dropping from $4.92 in 2019 to $4.84 in 2020.
Further, with Skyworks’ rising R&D expenses and the delay in the global launch of 5G, it will be a while till Skyworks bears the fruit of its R&D initiatives. Going forward, we expect revenues to stay weak in the near to medium term, and if the company is not able to control expenses, we believe the stock will see its P/S multiple decline from the current level of 7.2x to around 6.2x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $120, a downside of more than 15% from the current price near $145.
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