Throwing in the towel on AAPL and SWKS
We are throwing in the towel on both Apple ([stock_quote symbol=”AAPL”]) and Skyworks Solutions ([stock_quote symbol=”SWKS”]), given respective supplier and competitor warnings that point to a very rocky road ahead in the first half of 2016.
Following Thursday’s market close, both Cirrus Logic ([stock_quote symbol=”CRUS”]) and Qorvo ([stock_quote symbol=”QRVO”]) pre-announced weaker-than-expected December-quarter results, which they attribute to “customer demand.” I see that wording as code for demand from Apple (AAPL). Cirrus derives more than half of its revenue from Apple and Qorvo counts the smartphone company as a key supplier. There has been growing concern over iPhone production levels, which I’ve discussed at length — including Nikkei’s recent re-hash of a Morgan Stanley forecast predicting an iPhone production cut for the March quarter. However, Cirrus’s comments give me reason to think this will persist past the next few months. The company announced, “This weakness escalated over the last few weeks of December and is expected to continue to significantly impact our revenue in the March quarter.” To me, this suggests a weak outlook not only for the March quarter, but for the June quarter as well.
For Apple, the iPhone is its largest product business and sharp production cuts past the next few months mean the shares are likely to be dead money until perhaps its next iPhone refresh cycle. If history holds, that will not likely happen until the back half of 2016.
While I continue to like the rising dollar content and growth opportunities outside the smartphone market that is a key part of the Skyworks story, given the growing uncertainty of the overall market and potential for smartphone-related weakness to persist longer than previously expected, we would rather err on the cautious side, preserve capital and limit losses.
For those reasons, even though the shares have entered oversold territory, we are changing our rating on SWKS to “Sell” and dropping it from the Tematica Select List, as I suspect they will be in the “show me” camp for the next several months. We would look to revisit SWKS shares later in 2016 as smartphone industry expectations reset and non-smartphone growth opportunities that Skyworks has ahead of it mature further.
