Among the reasons shorts are bearish: Price cutting will get the best of these guys. Just one problem with that theory—it ain't happening. As is often the case, the proof is in the margins.
Last quarter Skyworks' gross margin lifted to nearly 42 percent. That may be an all-time record.
And Finisar at 31.7 percent, while nowhere near its highs, is headed in the right direction. And according to the company, it should rise to 34 percent to 35 percent.
Key here for both of these companies, especially Skyworks, is that price-cutting isn't what it used to be in this industry.
Consider that on its second quarter earnings call in April, one analyst pressed Skyworks about whether its price-cutting on one product would be “the standard 15, 20 percent this year.
CEO David Aldrich responded, “No, no. Nothing like that." CFO Donald Palette added, “First of all, we never saw 20 percent. We’ve been seeing 6 or 7 or 8 percent now for the third year in a row."
My take: Years ago in the graphics card industry, one company would, like clockwork, leapfrog the other technologically—predictably driving down prices by a fixed amount.
The difference now is that these industries have and are continuing to consolidate. And these companies appear to be getting stronger financially, not weaker.
They’re not the only ones, of course. JDS Uniphase and Oclaro are in Finisar’s universe; Skyworks battles RF Micro Devices , TriQuint and Anadigics .
They're all not created equally.
I realize there is more to this story. My goal is to present a sliver. If you disagree, I’d love to hear from you.