Skyworks Solutions Stock Is Skyrocketing - Is It Too Hot to Handle?

Semiconductors company Skyworks Solutions stunned Wall Street today as it surged to $108.68, marking a 5.5% change compared to the S&P 500 and the Nasdaq indices, which logged 1.4% and 2.3% respectively.

SWKS currently sits within range of its analyst target price of $108.23, which implies that its price may remain stable for the near future.

Surprisingly, analysts give the stock an average rating of buy, which shows that they believe prices could continue to move. Over the last year, Skyworks Solutions has underperfomed the S&P 500 by 18.4%, moving -28.4%.

Skyworks Solutions, Inc., together with its subsidiaries, 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 companyis in the technology sector, which groups together a wide range of industries including consumer electronics, software, computer hardware, scientific instruments and IT services. Legendary investor Warren Buffet once stated that he would never invest in technology companies. Apple is now one of his largest holdings.

The risks inherent to the technology sector are clear, but investors simply cannot ignore the potential for strong returns. Even with the lessons learnt in the 2000 tech bubble, the market continues to highly value the promise of technological innovation and the ability for these companies to build and occupy new markets.

Skyworks Solutions's trailing 12 month P/E ratio is 13.9, based on its trailing EPS of $7.81. The company has a forward P/E ratio of 9.8 according to its forward EPS of $11.06 -- which is an estimate of what its earnings will look like in the next quarter. The average trailing Price to Earnings (P/E) ratio of US-based technology companies is 26.5 as of third quarter of 2022. In contrast, the S&P 500 average is 15.97. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead).

Skyworks Solutions's P/E ratio tells us how much investors are willing to pay for each dollar of the company's earnings. The problem with this metric is that it doesn't take into account the expected growth in earnings of the stock. Sometimes elevated P/E ratios can be justified by equally elevated growth expectations.

We can solve this inconsistency by dividing the company's trailing P/E ratio by its five year earnings growth estimate, which in this case gives us a 0.7 Price to Earnings Growth (PEG) ratio. In SWKS's case, the elevated P/E ratio is justified by future earnings growth estimates -- assuming those estimates turn out to be close to reality.

An analysis of the company's gross profit margins can help us understand its long term profitability and market position. Gross profits are the company's revenue minus the cost of goods only, and unlike earnings, don't take into account taxes and overhead. Here's an overview of Skyworks Solutions's gross profit margin trends:

Date Reported Revenue ($ MM) Cost of Revenue ($ MM) Gross Margins (%) YoY Growth (%)
2022-09-30 5,486 2,881 47.48 -3.46
2021-09-30 5,109 2,597 49.18 2.33
2020-09-30 3,356 1,743 48.06 1.2
2019-09-30 3,377 1,773 47.49 n/a
  • Average gross margin: 48.1 %
  • Average gross margin growth rate: 0.0 %
  • Coefficient of variability (lower numbers indicating more stability): 1.7 %

While not the strongest, Skyworks Solutions's gross margins indicate that its underlying business is viable, and that the stock is potentially worthy for investment -- as opposed to speculative -- purposes.

Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Skyworks Solutions's last four annual reports, we are able to obtain the following rundown of its free cash flow:

Date Reported Cash Flow from Operations ($ MM) Capital expenditures ($ MM) Free Cash Flow ($ MM) YoY Growth (%)
2022-09-30 1,425 -510 915 -18.31
2021-09-30 1,772 -652 1,120 38.95
2020-09-30 1,204 -398 806 -14.62
2019-09-30 1,367 -423 944 n/a
  • Average free cash flow: $946,200,000.00
  • Average free cash flow growth rate: 2.0 %
  • Coefficient of variability (the lower the better): 13.8 %

With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in SWKS have received an annualized dividend yield of 2.2% on their capital.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts. As of the third quarter of 2022, the average P/B ratio for technology companies is 5.57. In contrast, the average P/B ratio of the S&P 500 is 2.95. Skyworks Solutions's P/B ratio is 3.2, indicating that the market value of the company exceeds its book value by a factor of more than3, but is still below the average P/B ratio of the Technology sector.

Since it has a very low P/E ratio, a lower P/B ratio than its sector average, a steady stream of strong cash flows on an upwards trend, Skyworks Solutions is likely undervalued at today's prices. The company has strong growth indicators because of a PEG ratio of less than 1 and consistent operating margins with a stable trend. We hope you enjoyed this basic overview of SWKS's fundamentals. Make sure to check the numbers for yourself, especially focusing on their trends over the last few years.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.