The stock market may have settled down since yesterday’s gyrations, but for two semiconductor stocks, the damage has been done. Both NXP Semiconductors (NXPI) and Skyworks Solutions Inc. (SWKS) were both caught up in the broader market sell-off and have both fallen 9% in the past five trading days. For those of you who have been following my blog, both NXPI and SWKS are among my top-rated chipmakers, and I’ve also recommended them in my Blue Chip Growth newsletter.
Is this the beginning of the end for these chipmakers? Is it time to let these recommendations go?
Not by a long shot. In fact, this presents a great tremendous buying opportunity. I’ll explain why in a moment, but let’s first discuss what has weighed on the stocks in recent days.
The bulk of the pullback came from general anxiety about some of the macro forces I highlighted yesterday. The broader market sell-off hit the tech sector particularly hard. The semiconductor-broadline industry, which NXP Semiconductors belongs to, has pulled back an average 5% this week. Integrated circuits companies, like Skyworks, have fallen an average 3.9%. With an average beta of 1.6 and 1.48 respectively, semiconductor-broadline and integrated circuit companies tend to be more sensitive to market ups–and downs.
This was compounded by a report from Digitimes Research that demand for 4G smartphones cooled in China during the third quarter. Smartphone vendors like Lenovo are finding that they have excess inventories and are slowing their orders to their upstream supply chains. This news weighed on SWKS shares in particular.
Those who sold, however, are failing to remember the No. 1 gamechanger when it comes to China’s adoption of 4G technology: Apple Inc. (AAPL). Apple has just been granted regulatory approval from the Chinese government, so the iPhone 6 and iPhone 6 Plus will go on sale on October 17. For the first time ever, all three of China’s largest state-run wireless carriers will carry the new iPhone. Back in the U.S., iPhone 6 sales topped 10 million in the first weekend, and it’s looking like there is going to be another huge turnout in China. In just six hours after the October 17 announcement, Chinese carriers and retail outlets took in 2 million reservations for the iPhone 6.
Both NXP Semiconductors’ and Skyworks Solutions’ handiwork is in the iPhone 6. NXP Semiconductors helped integrate secure near-field communications (NFC) technology into the iPhone, which allows the handset’s revolutionary pay by touch feature. Skyworks Solutions specializes in mobile communications systems, supplies at least two major components to the iPhone.
There’s no denying that the iPhone 6 is going to be a major cash cow for both of these companies, and the best part is that its building upon an already strong base for sales and earnings. Just take a look at the analyst projection for the upcoming earnings season:
NXP Semiconductors is expected to report quarterly results around October 22. The firm is expected to earn $1.31 on $1.50 billion in sales. This works out to 20.0% annual sales growth and 54.1% earnings growth, well above the 20.5% industry average. We’ve also seen an 11% increase in the consensus EPS estimate in the past 90 days, which means it’s likely that NXP Semiconductors will post another earnings surprise (as it has for the past several quarters).
Skyworks Solutions is due to post quarterly sales and earnings around October 30. The consensus estimate calls for earnings of $1.01 on $679.26 million in revenue. This translates to 42.2% annual sales growth and 57.8% earnings growth. Over the past 90 days, the consensus estimate has jumped nearly 15%, which is also a good indicator of an earnings surprise.
So I have both of these stocks on my watch list, and I recommend both NXPI and SWKS as strong buys in the weeks leading up to their respective earnings reports. This is a tremendous opportunity to buy on the pullback.
P.S. If you’d like more information on NXPI or SWKS, including my current price limits for the stocks, you can access it through a risk-free trial of Blue Chip Growth.