The Chinese chip-wreck is overdone, and it is time to take a stand. Skyworks will retain its market share regardless of what happens to Huawei. Starbucks may not be so lucky as Chinese nationalism grows along with increased competition.
NEW DIRECTIONAL CALL PLAYS
SWKS - Skyworks - Company Profile
Skyworks Solutions, Inc., together with its subsidiaries, designs, develops, manufactures, and markets proprietary semiconductor products, including intellectual property worldwide. Its product portfolio includes amplifiers, antenna tuners, attenuators, circulators/isolators, DC/DC converters, demodulators, detectors, diodes, directional couplers, diversity receive modules, filters, front-end modules, hybrids, LED drivers, low noise amplifiers, mixers, modulators, optocouplers/optoisolators, phase locked loops, phase shifters, power dividers/combiners, receivers, switches, synthesizers, technical ceramics, voltage controlled oscillators/synthesizers, and voltage regulators. The company provides its products for use in the aerospace, automotive, broadband, cellular infrastructure, connected home, industrial, medical, military, smartphone, tablet, and wearable markets. It sells its products through direct sales force, electronic component distributors, and independent sales representatives. Skyworks Solutions, Inc. has a collaboration agreement with MediaTek Incorporated to deliver standards-based 5G solution. The company was founded in 1962 and is headquartered in Woburn, Massachusetts. Company description from FinViz.com.
Skyworks shares have been crushed in the tariff war and the resulting chip-wreck. Many of the companies that buy from Skyworks have been hit by tariffs that depress their sales. However, this could be n ideal buying opportunity.
Other than Qualcomm, Skyworks probably has the most to gain from the 5G revolution. They said the amount of Skyworks chips in 5G phones will be 40% more than in a 4G phone. Skyworks recently provided a graphic showing all the components they will be supplying for most 5G phones. Their revenue per phone will increase from $18 to $25 per phone.
5G is also going to revolutionize the Internet of Things (IoT) devices because the greater speed will allow them to perform more functions an be in more places. Skyworks will be selling those chipsets as well. Literally billions of 5G IoT devices will be sold over the next several years.
They do have risk. Huawei is on the verge of being blacklisted by the USA and the EU. They will have a hard time selling phones outside of China. Huawei is currently a large customer of Skyworks. However, just because Huawei will not be able to sell phones in the US or EU it does not mean people in those areas will not be buying phones. They will simply be buying different phones from other manufacturers and they will still contain Skyworks chips.
Skyworks rallied 36% off the December lows to close at $93.56 in April. They gave back 29% in the chip-wreck since May 1st to trade at support at $68. This is a monster drop to support and should be a buying opportunity. While we cannot foresee the future headlines, the drop back to support should prevent them from a continued decline unless the headlines are severe.
Earnings August 1st.
Buy July $75 call, currently $2.10, stop loss $65.85.
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SBUX - Starbucks - Company Profile
Starbucks Corporation, together with its subsidiaries, operates as a roaster, marketer, and retailer of specialty coffee worldwide. The company operates in four segments: Americas; China/Asia Pacific; Europe, Middle East, and Africa; and Channel Development. Its stores offer coffee and tea beverages, roasted whole bean and ground coffees, single-serve and ready-to-drink beverages, iced tea, and food and snacks; and various food products, such as pastries, breakfast sandwiches, and lunch items. The company also licenses its trademarks through licensed stores, and grocery and foodservice accounts. It offers its products under the Starbucks, Teavana, Tazo, Seattle's Best Coffee, Evolution Fresh, La Boulange, Ethos, Frappuccino, Starbucks Reserve, Princi, Starbucks Doubleshot, Starbucks Refreshers, and Starbucks VIA brand names. As of April 25, 2019, the company operated approximately 30,000 stores. Starbucks Corporation was founded in 1971 and is based in Seattle, Washington. Company description from FinViz.com.
Starbucks has been the king of coffee for decades. However, lately their market share has been under attack by McDonalds McCafe, Dunkin Donuts and Panera in the US. They were still king in China. Over the last decade they have opened 3,000 stores in China and continue to open one per day. Unfortunately, they have a new challenger in China that has opened nearly 3,000 stores in just the last year.
Starbucks expects to have 5,000 stores in China by 2025. Lukin Coffee plans to have 5,000 stores by the end of 2019. Where Starbucks is opening one store per day, Lukin is opening 7 stores per day.
The Starbucks theory has always been Chinese people will drink coffee once they are exposed to it. China is a tea culture. Starbucks stores appear, they get people to try coffee and some become converts and customers.
Luckin's plan is to offer a broad range of teas and coffee. That way the consumer does not have to change their taste patterns and can continue to be tea drinkers. Those that have been exposed to coffee at Starbucks can now get their coffee elsewhere.
The challenge for Starbucks is that Luckin is very price conscious. They do not accept cash. All purchases are made and paid through their app. Just signing up will get you a reward of 14 coupons on average. Some allow you to purchase a latte for as little as 69 cents where Starbucks charges $4. Once you have downloaded their app you receive a continuous stream of promotions based on what you have ordered in the past.
Starbucks is the lumbering giant in the China coffee market and Luckin is the super smart entrepreneurial kid that is running circles around the giant.
Coupled with the market share challenges in the US, Starbucks has a hard road ahead. It is very possible they will succeed but over the next several months investors are likely to be wary since China has been the growth sector for Starbucks. If their earnings begin to show weakness and loss of market share, the 2019 rally could quickly evaporate.
Earnings July 25th.
Buy July $75 put, currently $1.75, stop loss $79.85.