If you are looking for the answer to the recent selloff in Skyworks Solutions Inc. (NASDAQ: SWKS) stock, looking no further than Samsung Electronic Krw5000 (OTCMKTS: SSNLF)’s recall of millions of Galaxy Note 7 smartphones.
Samsung announced that it is recalling more than 2.5 million Note 7 devices from the market. The massive recall is based on the risk that the battery in the smartphone could explode while charging.
What does Samsung’s recall of Note 7 have to do with Skyworks Solutions Inc (NASDAQ: SWKS)? Samsung is Skyworks’ second-largest customer. The company supplies Samsung with semiconductor chips for smartphones. As such, Skyworks relies heavily on the sales of Samsung handsets. Therefore, investors see that the recall of the millions of Note 7 devices will disrupt the revenue flow at Skyworks, thus the selloff.
FAA warning about Samsung’s Note 7
In what could deepen Skyworks’ woes, the Federal Aviation Administration has issued a warning to travelers regarding carrying or using Note 7. The FAA is telling travelers not to charge or turn on their Note 7 smartphones on airplanes operating within the U.S. airspace. The warning extends to packing Note 7 in their travel bags.
You see that the more authorities seem to attach serious explosion risk to the Note 7 the more it deters potential buyers of the handset and Skyworks will certainly feel the heat sooner than later.
Perhaps the greatest worry is that the recall could have long-term impact on the perception of Samsung smartphones, thus limiting sales and hurting Skyworks in the process.
Lack of customer diversity – Skyworks Solutions Inc. (NASDAQ: SWKS)
Skyworks Solutions Inc. (NASDAQ: SWKS)’s customer base is not adequately diversified. The company heavily relies on sales to Apple Inc. (NASDAQ: AAPL) and Samsung. However, these two customers are facing pressure in the smartphone market amid saturation in developed market and fierce competition in emerging and developing markets. Sales of iPhone have been shrinking in the recent quarters and Apple is only hoping that the recently unveiled iPhone 7 will help it halt the slide.
The challenging facing Skyworks’ largest customers explain the recent volatility in the company’s earnings.
To hedge against the slowdown in its mains smartphone business, Skyworks Solutions Inc (NASDAQ: SWKS) can be seen trying to expand into new markets such as smart TV and wearables.