The Apple Inc. (NASDAQ:AAPL) love-fest shows little signs of fading, even after the 10th iPhone anniversary has come and gone. AAPL stock is down less than 2% two days after the event, which is not nearly as bad a sell-off compared to previous iPhone launches. AAPL stock has a curious history of selling off after a major product launch, though more often than not, the stock manages to recover over the next couple of months.
As widely expected, Apple launched its most technologically advanced, and most expensive iPhone, to-date — the iPhone 8 — with a price tag of $999, as well as the $699 iPhone 8 and $799 8-Plus. The iPhone X sports several nifty features including an edge-to-edge 5.8-inch OLED screen, face ID in place of touch ID, wireless charging, and lacks a home button.
The mid-tier iPhone 8 and iPhone 8 Plus, though not as impressive as the premium iPhone, are still a considerable upgrade on iPhone 7, including features such as a glass back, wireless charging and other technical upgrades.
But that’s not all. The event seems to have lived up to its billing as Apple’s biggest keynote confab, as the Cupertino, Calif. company delivered a slew of other products including a 4K Apple TV, Apple Watch Series 3, wireless charging pad dubbed AirPower and animated emojis. The company also announced new operating systems — iOS 11 and Mac OS High Sierra — to be available for download starting Sept. 19 and Sept. 25, respectively.
Potential Barbs for AAPL Stock
The event helped to redeem the notion that Apple’s innovation DNA was on its deathbed. Still, the event came up short on two expectations: no launch of the HomePod smart-speaker and the disappointing news that the iPhone X will not ship until Nov. 3.
Despite the enthusiasm surrounding AAPL stock, potential barbs could be waiting in the wings. First off, there’s a good chance that iPhone X, the real crowd pleaser from the event, will prove to be a tough sell even domestically. A recent Barclays survey found that only 18% of iPhone owners plan to buy the new model at a price point of $1,000, which is the base price for the iPhone X. That’s excluding necessary accessories such as wireless charging tools($70) and AppleCare services for $149 and $199 for the iPhone 8/8+ and iPhone X, respectively. The buying intention doubles to 36% for a price point of $800, once again proving how price-sensitive the smartphone market has become.
Meanwhile, Ovum analyst Daniel Gleeson is of the opinion that people might put off buying the iPhone 8/8+ till the arrival of iPhone X, something he believes could cut typical first-week sale of 10-12 M devices by half. Sounds like a crazy argument at first, but makes some sense when you give it more thought.
In a previous article, I explained why Apple has lately lost its shine in China. The last quarter was not any better, with revenue in Greater China dropping 10% Y/Y to $8 billion. Part of that is due to the Beijing government and its labyrinth of laws that foreign companies such as Apple have to dance around. The rest can be chalked up to good old competition from the likes of Huawei and its much cheaper iPhone-esque knockoffs.
At this juncture, it’s good idea to hedge your bets on AAPL stock.
Smartphone Market Resumes Growth
Luckily for AAPL stock investors, there are a couple of solid smartphone picks out there. After a two-year hiatus, the smartphone market has finally resumed growth. According to research outfit Gartner, global smartphone sales to end-user increased 6.2% during Q2, with the firm citing increasing 4G adoption as a key driver.
The buying momentum is expected to build up in the coming quarters. Here’s the catch: demand will mainly be driven by midpriced [$150 to $200] smartphones, whereas high flash memory prices and OLED supply issues is seen crimping growth for most premium smartphones.
We have already seen this with a late iPhone X launch. Samsung will be the sole OLED supplier for Apple till 2019, and we all know single-sourcing is always a risky proposition.
A good investment strategy here would be to bet on companies that allow you to double-dip into the high-margins of premium manufacturers like Apple as well as the lower tiers of the market.
My top picks here are Skyworks Solutions Inc (NASDAQ:SWKS), Qorvo Inc (NASDAQ:QRVO) and Broadcom Ltd (NASDAQ:AVGO).
1. Skyworks Solutions, YTD return: 43.1%
Skyworks Solution is perhaps one of the best-known of Apple’s suppliers, deriving ~44% of its revenue from selling it iPhone components such as RF filters and power amplifiers. Other key customers include Samsung Electronics Co Ltd (KRX:005930) as well as leading Chinese smartphone manufacturers including Huawei, Oppo and Vivo.
The company’s relatively high exposure to Apple makes it a prime supply chain play during times of new product launches, though, of course, the opposite is true whenever iPhone sales start dragging.
Luckily, SWKS is much more than a leading Apple supplier. The company has been aggressively pursuing Chinese smartphone makers–and has begun reaping the dividends. The company has been making decent component gains in Samsung and Huawei devices, which is great because these are the #1 and #3, respectively, smartphone players worldwide. SWKS has been churning out China-centric products, including a front-end LTE module, to help tap into the country’s rapidly expanding LTE market.
Other than manufacturing smartphone chips, SWKS has spread its wings into the automotive sector as well as the Internet of Things (IoT). The company now supplies connectivity chips, LTE modules and GPS solutions for three automakers according to its latest quarterly report.
Skyworks reported solid Q2 revenue growth of 19.8% Y/Y and also issued strong Q3 guidance. Meanwhile, the company’s gross and operating margins have been improving after falling sharply in 2016 due to the smartphone slump.
2. Qorvo, YTD return: 38.5%
Formed through the merger of RF Micro Devices Inc. and TriQuint Semiconductor Inc. in 2015, Qorvo has emerged as a formidable Skyworks Solutions’ competitor. Just like its bigger rival, Qorvo enjoys a large exposure to Apple, with ~32% of its revenue coming from the iPhone manufacturer. The company generally sells smartphone components that overlap with Skyworks’, but with significant differentiation, as noted below.
First off, Qorvo has a bigger exposure to Huawei than Skyworks (12% of revenue vs. 7% by SWKS). Huawei is by far the fastest-growing of the large smartphone manufacturers, with shipments growing nearly 20% Y/Y during the last quarter. Part of Huawei’s success can be pinned on its penchant to mimic popular high-end smartphones but at much lower price points, as well as its ongoing success penetrating the European market. A healthy exposure to the Chinese giant augurs well for Qorvo’s future.
Further, Qorvo seems to be winning in the carrier-aggregation battle against Skyworks and Broadcom. Carrier-aggregation, or CA, is a technology that bonds multiple band spectrums into a wider channel, allowing for faster data services. Qorvo manufacturers industry-leading multiplexers that allow for seamless CA, something that has been helping the company score significant design wins.
Qorvo derives about 30% of its revenue from the defense segment where its GaN and BAW products are used to power the defense, aerospace, cable, VSAT, base station , and point-to-point infrastructure. Qorvo has multiyear U.S. defense contracts supporting programs such as the F-16 and F-35. Revenues from its largest defense customers more than doubled during the last quarter.
3. Broadcom (formerly Avago) YTD return: 39.3%
Broadcom merged with Avago Tech in early 2016. The company gets ~20% of its revenue from Apple through selling custom chips (ASICs) for iPhones, iPads, MacBook Pro and MacBook Air. The company is also reportedly working with Apple on wireless charging technology. Additionally, the company supplies wireless communications offerings to major carriers including AT&T Inc. (NYSE:T).
Cannacord Genuity has predicted that Broadcom will enjoy a nice 40% content gain in the iPhone X. That should provide a good degree of revenue visibility for investors over the next couple of quarters at the very least.
If you are an investor who believes in solid operating metrics as a means to downside protection, you’ve got to love this company. Of the three Apple suppliers, Broadcom boasts the best operating margins — an incredible 46% during the last quarter compared to 33.8% for SWKS and -4.3% by QRVO. Meanwhile, the company has already bested its gross margin prediction of 60% after posting GM of 63% during the last quarter.
The company had also predicted cost synergies to the tune of $800 million at the time of the merger, and that seems to be playing out nicely. Improving profitability is always a great way to drive strong share gains, and Canaccord’s $300 price target (19% upside by current prices) for AVGO does not appear far-fetched.
Bottomline on AAPL Stock
Investing directly in AAPL stock could work out great if the roll of the dice works out in your favor and iPhone X lives up to the hype. A better strategy though would be to dig your heels in by investing in companies that do business with Apple and are at the same time exposed to other mid-and low-tiers of the smartphone market as well. You can find a comprehensive list of Apple suppliers here.
As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.
