Up in the Skyworks (SWKS)

by Dan November 20, 2017 12:06 pm • Trade Ideas

This morning we wake to yet another semiconductor merger between Marvell Technology (MRVL) paying $6 billion for Cavium (CAVM), with acquirer MRVL offering the following justification in the press release (emphasis mine):

The transaction combines Marvell’s portfolio of leading HDD and SSD storage controllers, networking solutions and high-performance wireless connectivity products with Cavium’s portfolio of leading multi-core processing, networking communications, storage connectivity and security solutions. The combined product portfolios provide the scale and breadth to deliver comprehensive end-to-end solutions for customers across the cloud data center, enterprise and service provider markets, and expands Marvell’s serviceable addressable market to more than $16 billion.

While “cloud data center” is not as buzzy as the Internet of Things, Artificial Intelligence, or Machine Learning, but the “comprehensive end-to-end solutions” enables customer platforms in these buzzier emerging technologies. It appears that some of the m&a deals earlier in the cycle in the semi space, like Intel’s (INTC) $17 billion bid for Altera in 2015, or their $15 billion bid for Mobileye, their foray into IoT and Autonomous driving respectively in an effort to diversify away from PCs have made some of the deals we are seeing now look like adding scale of existing businesses, like this morning’s deal.  One such company that might be a target for those looking to add to existing heft in mobile handsets is Skyworks Solutions, who gets about 40% of its sales from Apple (AAPL), 12% from Samsung and 10% from Chinese handset maker Huawei.

SWKS gets about 25% of their sales from China, which might be viewed as a positive as the country’s current smartphone penetration rate is below 60% which remains a sizable opportunity for a country that saw 4G service growth of 84% in 2016 to 750 million people, nearly double that of the U.S.. Oh and that 10% revenue from Huawei is crucial as growing share with this vendor comes at a time when they are looking to expand outside of China as the company’s annual smartphone sales are close to overtaking that of AAPL’s.  But the interest of potential buyers of SWKS would also need to focus on their push into emerging technologies, per The Motley Fool:

Skyworks classifies the revenue it generates from non-smartphone applications under the broad markets category. This segment supplied 26% of the chipmaker’s top line last quarter, pulling in an estimated $256 million in revenue, representing a year-over-year increase of over 22%.

The terrific growth can be attributed to the growing traction of Skyworks’ chips across fast-growing markets such as smart homes, smart speakers, and smartwatches. For instance, Skyworks is now supplying connectivity modules to Bosch and Cisco for home security and smart-home lighting systems, respectively.

Shares of SWKS trade about 15x expected fiscal 2018 eps growth of 13%, and about 5x expected sales growth of 11%, which is essentially inline with many peers, but well below a market multiple and the multiples that many stocks in the space have been acquired at.

Despite the stock’s 47% ytd gains, SWKS has spent the better part of the last 8 months consolidating between $100 and $110:

SWKS 1yr chart from Bloomberg

Last week, prior to earnings, SWKS broke out to a new all-time high, before its slight retreat. But the stock has healthy near-term technical support at $100 and little overhead resistance above the prior high:

SWKS 5yr chart from Bloomberg

The next identifiable catalyst will be fQ1 results in the back half of January, which should show strong uptake of Apple’s new iPhone X.

So what’s the trade? For those who think the stock might be a take-over target but not likely between now and year-end, it might make sense for further consolidation between now and year-end below the recent high and play for a breakout in the new year:

Trade Idea: SWKS ($110) Buy Dec 29th / Feb 115 call Calendar for $2.80
  • Sell to open 1 Dec 29th 115 call at $2
  • Buy to open 1 Feb 115 call for $4.80


Breakeven on Dec expiration: This trade does best slightly higher into year end, with best gains in the trade the closer to 115, losses lower than here. The ideal situation is a close near 115, then once the Dec 29th call expires, rolling the short leg into February to create a vertical.

Rationale – This trade is mildly bullish inot year end, and plays for a breakout in January and February. It risks only 2.80 no matter what happens and has several ways to make money, both into year end and beyond.