This Stock Is Set For Even More Outperformance

Conditions in China appear to be going from bad to worse.

On Monday, another bloodbath ensued in Chinese stocks. The Shanghai Composite Index nosedived 8.5% – the largest single-day decline in eight years. For every stock that rallied, 75 plummeted.

So much for all those government stimulus measures!

[ad#Google Adsense 336×280-IA]I’m afraid the latest news on the economic front isn’t much better.

Once the poster child for GDP growth, China’s economy is now decelerating – and at a faster rate than many expected.

After decades of double-digit growth, we can now expect, at best, 7% growth moving forward.

Believe it or not, though, there’s one Chinese trend on the up-and-up that we can safely exploit for double-digit gains.

It’s All About Mobile
For over four years, I’ve been on the record stating that the exploding use of mobile devices promises to be the world’s biggest tech trend and, in turn, profit opportunity. Ever.

Given the country’s population of nearly 1.4 billion people, China is a big part of that trend.

The latest data from the China Internet Network Information Center (CNNIC) shows that in the first half of the year, mobile internet traffic increased 36.8 million to 594 million users. That works out to 89% of China’s internet users, up from 85.8% at the end of last year.

When we’re dealing with such large numbers, it’s easy to lose perspective. After all, we’re talking about a single country’s mobile internet device user base being bigger than a single continent’s population (North America).

Even more mind-boggling, there’s still room to grow. Consider: Over 700 million Chinese citizens still don’t have access to the internet.

Now, you’d think the smartest way to play the boom would be to scoop up smartphone manufacturers like Apple (AAPL), Huawei, or Xiaomi. Think again!

Most don’t make any money. Except Apple, of course. It earns 92% of the industry’s operating profits, despite accounting for less than 20% of global sales volumes. The other 1,000 or so smartphone companies either break even or lose money, according to Canaccord Genuity.

Instead, the biggest profit opportunities reside in smartphone component manufacturers.

Welcome to the Radio Frequency Boom
As I shared in March, in order to meet exploding mobile data demands, more radio frequencies (RF) need to be supported in each smartphone. That means the total dollar amount of RF components in smartphones keeps rising.

Take the latest iPhone 6, for example. Total RF front-end content costs checked in at $15.89 per phone, according to Barclays’ analysis. That’s up a staggering 324%, compared to a typical 3G phone.

The headiest RF growth can be found in relation to global long-term evolution (LTE) – or 4G – adoption. Enabling phones to communicate on the highest speed network requires more and more complex (read: more expensive) RF content.

And that brings us back to China.

We learned on the latest Apple conference call that LTE penetration rates in China check in at a measly 12%. In other words, the RF boom has another 88% to go in China.

Or as the CEO of Skyworks Solutions (SWKS) – a leading RF component supplier – recently said, “I do believe we’re in the early innings in an upgrade cycle with 4G being kind of the operative technology.”

Speaking of Skyworks…

Buy, Buy, Buy!
Back in January, during an appearance on CNBC’s Closing Bell, I dubbed Skyworks a “must-own” stock for 2015. Since then, the stock is up almost 30% compared to a 6% rise for the Nasdaq.

Last week, I reiterated my stance on CNBC. And I’m going to do it again right now on the heels of the company’s quarterly report and recent price pullback.

What’s the basis for my bullishness? The list is long.

In the most recent quarter…

  • Sales increased 38% to $810 million.
  • The company’s mobile segment (i.e., RF content), which accounts for more than half of total revenue, grew the fastest – up 120% year over year.
  • Skyworks is growing impressively outside of mobile, too. The company’s broad markets segment enjoyed a 23% year-over-year increase in sales.
  • Gross margins expanded to 49%, up more than three full percentage points.
  • Earnings per share soared 60% year over year to $1.34.
  • Management doubled the dividend.

Rest assured, this quarter wasn’t a fluke. On the contrary, this marks the 10th consecutive quarter of earnings and double-digit sales growth at Skyworks.

And with the company coming into its two seasonally strongest quarters, the stage is set for even more outperformance.

Not to mention, management is most “excited” about the opportunity in China. They believe they can earn up to as much as $4 per phone. That adds up when you consider 250 million 4G phones are expected to be sold in China this year.

Bottom line: As I’ve noted before, very few investors think about what it takes on the inside of mobile phones to enable them to work properly. But they should, because it’s an incredibly lucrative business for the companies behind such technology. Particularly in China. And it’s not too late to profit from the boom with Skyworks.

Ahead of the tape,

Louis Basenese

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Source: Wall St. Daily