Apple and Android smartphone sales are weak, but another stock is paying the price

By Wallace Witkowski

Skyworks Solutions shares drop after weak forecast, analyst downgrades stock on fears of a 'structural issue emerging'

Skyworks Solutions Inc.'s stock dove Tuesday as analysts parsed how much weak Android and Apple Inc. smartphone sales figured into the wireless chip maker's forecast.

Skyworks shares (SWKS) spent the session climbing out of a 12.5% crater at the open, and were last down 6.1% Tuesday. BMO analyst Ambrish Srivastava said he was downgrading the stock to market perform from outperform and chopping his price target to $100 from $140, because he found there were more questions than answers coming out of the company's earnings report late Monday.

"As a rule of thumb, we are loath to changing ratings after the fact," Srivastava said in a Tuesday note. "The exception to that is when we either cannot add it all up, if we see a structural issue emerging, or if we see a multi-quarter headwind."

"In this case we see some combination of the above," the BMO analyst said. "Thus, we would rather stay on the sidelines."

Skyworks forecast a midpoint earnings of $1.67 a share on revenue between $1.05 billion and $1.09 billion for its third fiscal, or current, quarter, while analysts surveyed by FactSet had estimated $2.06 a share on revenue of $1.15 billion. By Tuesday, the Wall Street consensus was down to $1.68 a share on revenue of $1.07 billion.

Susquehanna Financial analyst Christopher Rolland, who has a positive rating and a $125 price target on the stock, said that the forecast suggested demand for phones that use Alphabet Inc.'s (GOOGL)(GOOGL) Google Android operating system and inventory digestion "continue to weigh on the outlook."

Skyworks makes the radio-frequency, or RF, connectivity and amplification chips necessary for mobile connections to networks like 5G.

"We believe the overemphasis on Android was in part to 'save face' for weakness at Apple (AAPL)," which was also down 18% quarter-over-quarter, Rolland noted. "While we have no doubt Android was weak, we note Android's small contribution to sales in the December quarter... so even if Android went to zero this quarter, it would only impact revenue by a small amount."

"Management still believes they are on track to deliver content gains intoApple this year (compared to recent speculation suggesting they may have lost sockets)," Rolland said.

Citi Research analyst Atif Malik called the outlook "disappointing," and held on to his neutral rating on "decelerating 5G smartphone adoption, concerns on increasing RF competition, and Apple concentration risk."

Malik found it interesting that executive comments on China Android recovery and mobile sales picking up in the September-ending quarter "were worse than peer Qorvo Inc. (QRVO) giving investors the perception of [dollar] content share loss in China Android and Apple (64% of sales customer in the Mar-Q)."

Of the 31 analysts who cover Skyworks, 15 have buy-grade ratings, 15 have hold ratings, and one has a sell ratings, along with an average price target of $119.17, down from a previous $128.13, according to FactSet data.

Skyworks shares are still up 8% year to date, while the PHLX Semiconductor Index is up 17%, the Nasdaq Composite Index is up 16.5%, and the S&P 500 index is up 7.5%.

-Wallace Witkowski

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05-09-23 1428ET

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