The past six months have been a windfall for Skyworks Solutions’s shareholders. The company’s stock price has jumped 61.6%, hitting $86.77 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Skyworks Solutions, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Skyworks Solutions Will Underperform?
We’re glad investors have benefited from the price increase, but we’re cautious about Skyworks Solutions. Here are three reasons why there are better opportunities than SWKS, plus one stock we’d rather own.
1. Revenue Spiraling Downwards
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. Skyworks Solutions struggled to consistently generate demand over the last five years as its sales dropped at a 3.3% annual rate. This wasn’t a great result and is a sign of poor business quality. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
2. Projected Revenue Growth Shows Limited Upside
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Skyworks Solutions’s revenue to stall. Although this projection indicates its newer products and services will spur better top-line performance, it is still below the sector average.
3. Shrinking Operating Margin
Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.
Looking at the trend in its profitability, Skyworks Solutions’s operating margin decreased by 19.6 percentage points over the last five years. Skyworks Solutions’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was 7.6%.
Final Judgment
Skyworks Solutions falls short of our quality standards. Following the recent rally, the stock trades at 19× forward P/E (or $86.77 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find more timely opportunities elsewhere. Let us point you toward an all-weather company that owns household favorite Taco Bell.
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