Skyworks Solutions has been hit hard, even though it’s holding on to its business gains from 5G.

The massive upgrade cycle kicked off by 5G mobile networks has not been enough to spare Skyworks Solutions ( SWKS -0.76%) from the bear market of 2022. The company sustained its growth as mobile networking continues to advance, but shares are nonetheless down more than 50% from all-time highs in 2021.

Skyworks has been investing heavily to update its business for a new decade of growth in mobile communications, and profitability could be poised for a big rebound as a result. Is this chipmaker still a buy? Enduring growth, sagging profitability

Skyworks Solutions is a chip designer and manufacturer, particularly for mobile connectivity. The smartphone boom of the 2010s put the company on the map, and to this day, Apple (NASDAQ: AAPL) remains a top customer. In the third quarter of fiscal 2022 (the three months ended on July 1), management said its “largest customer” (Apple) accounted for 55% of revenue. Samsung was the other big customer, accounting for 10% or more of total sales.

Given this dynamic, the initial wave of 5G-enabled smartphones was a massive tailwind for Skyworks in late 2020 through 2021. Building on this 5G strength, it acquired the automotive and networking infrastructure business from Silicon Labs (NASDAQ: SLAB) last summer. This takeover helped Skyworks’ revenue continue to grow, although smartphone-specific sales have been slumping a little. This isn’t breaking news; other chip companies concentrating on consumer electronics are experiencing similar smartphone and consumer-electronic slowdowns right now, too. Skyworks had been building its connectivity-chip business outside of smartphones for years, but the Silicon Labs acquisition was a big boost on this front. Management said its Broad Markets segment (network infrastructure, automotive, industrial equipment, smart-home devices, wearables, and more) was 38% of revenue in the third quarter of fiscal 2022, and was up 38% from a year ago.

Despite overall expansion, though, profitability as measured by free cash flow (FCF) fell 15% over the last trailing-12-month stretch to $953 million (an 18% profit margin). In years past, Skyworks generated FCF margins well north of 20%, sometimes higher than 30%.

Revenue growth is great, but not if it comes at a permanent cost to the bottom line. Looking at this metric, the stock would appear to be a sell right now. But there’s more to the story. Is this stock too cheap to ignore?

There are a few factors hurting Skyworks’ FCF. First, there’s the aforementioned slowdown in smartphone sales this year, and ongoing COVID-19 lockdowns in China aren’t helping. Also, Skyworks is meeting its customers needs, but the chip shortage is persisting elsewhere at other component suppliers. As a result, the need for Skyworks’ chips is being throttled until other parts arrive to complete a finished product.

But eventually the chip shortage will get resolved, and that pent-up demand will need to be fulfilled, and Skyworks will be ready. Additionally, the company has been investing heavily in its technology and manufacturing processes over the last year. That also temporarily capped FCF, but management sees margins climbing back toward 30% or higher as that spending begins to yield results.

Over the longer term, growth in wireless data traffic isn’t going to abate — not with 5G networks unlocking new uses for consumers (video streaming, video games, connected vehicles) and businesses (connected industrial equipment, artificial intelligence at the network edge). Even with a less-than-perfect balance sheet right now (cash and investments of $662 million, debt of $2.19 billion related to the Silicon Labs acquisition last year) and depressed free cash, Skyworks stock is worth a look. Shares trade for 26 times enterprise value to trailing-12-month FCF.

Of course, this isn’t a cheap stock, so I’m not adding to my existing position right now. Revenue growth isn’t exactly firing on all cylinders. At best, smartphone sales are plateauing again, although the company is still forecasting some growth for the balance of 2022. But this could be a big FCF growth story for the next few years if margins rally, with more potential revenue growth in the mobile market outside of smartphones over the next decade.

After a rough year, I certainly wouldn’t give up on Skyworks Solutions stock now. If you’re looking for a solid 5G and chip manufacturer , this one might be up your alley. Should you invest $1,000 in Skyworks Solutions, Inc. right now?

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source Is Skyworks Solutions, a Top 5G Stock, Still a Buy?

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