Strongly Weathering the Storm

Naomi is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It is not surprising that when Apple (NASDAQ: AAPL) suffers a decline, most of the company’s suppliers suffer the same fate. One example is Qualcomm (NASDAQ: QCOM). This company derives not less than 6% of its revenues from transactions with Apple. When the news of Apple’s price target being slashed by Wall Street analysts came out, with Citigroup slashing the company’s price target from $675 to $575 and cutting its rating from Buy to Neutral, it affected suppliers, with Qualcomm trading as low as $59.56 against the $61.24 average it was previously trading at.

Pacific Crest, on its own part, made a 12% slash of Apple’s price target by lowering it from $645 to $565. Also, the company’s EPS estimate for fiscal year 2013 was lowered by 12% as well from $51.49 to $45.13. According to Pacific Crest’s analyst, Andy Hargreaves, on Monday, said “We believe weak global economic conditions and saturation at the high end of the smartphone market are reducing Apple's ability to add new iPhone users.” Another analyst, T. Michael Walkley from Canaccord Genuity however maintained a Buy rating for the stock even as he lowered its price from $800 to $750.

According to Walkley, “While our November channel checks indicated very strong sales of the iPhone 5, we are slightly lowering our F2013 and F2014 iPhone and iPad estimates due to softer sales expectations in international markets, primarily in Europe. While order reductions to iPhone suppliers are not unusual this time of year, we believe reduced iPhone 5 orders for the March quarter could also indicate an earlier launch of new iPhone products in the June quarter. Despite our slightly lowered estimates, we believe Apple’s industry-leading software ecosystem and integrated hardware experience will result in a strong multi-year product cycle.”

Before all these drama started unfolding, a portfolio manager from Toccqueville Asset Management, Robert Kleinschmidt, recommended that investors should sell shares of Apple and rather buy shares of Microsoft Corporation (NASDAQ: MSFT), which is currently trading at around $27.10 with a 52-week high of $32.95 and 52-week low of 25.44 and current FY EPS of $2.89. His recommendation then was based on the thesis that Microsoft was cheap in valuation and comes with limited downside. He also compared the risks of buying Apple to that of buying “Sony in the past.”

Even in the face of all of this, Qualcomm bounced back by Monday as it closed at $62.02 and maintained a 52-week trading range that was between $51.76 and $68.87. This came on the heels of the news that Apple sold about 2 million iPhone 5s in China over the weekend. Another contributing factor to the bounce were the findings from a research firm which noted that there has been a considerable increase in the company’s (Qualcomm) market share in the chip industry.

It would also interest investors to know that in the report released on December 17, 2012 by Gartner, the company experienced a revenue growth rate of 29.6% in 2012 and a rise from the 6th position it held in the semiconductor industry in 2011 to 3rd position in 2012. According to Gartner, this increase was as a result of the company’s “continued adoption of smartphones and the growth of 3G and LTE technology in emerging regions, such as China and India.” Intel (NASDAQ: INTC), currently trading at $20.57, recorded a 2.7% decline in revenue, it however, maintained its 1st position for the 21st consecutive year, with a 16.6% market share in the industry, applauded as the company’s best performance ever by Gartner.

Finally, other facts that would make investors feel at ease includes the fact that Qualcomm does not supply to Apple alone but also makes supplies to other companies and this will help the company to brace itself should there be, for any reason, supply issues with Apple. The company has no zero debt rating, maintains around $26 billion in cash on its balance sheet and has a market cap of $100 billion. On Wall Street, Qualcomm maintains not less than 40 Buy ratings and five holds from analysts. With these few facts, I believe that this company is sure to weather the storm arising from the decline in Apple’s stock price.

 


Chizy has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Intel, Microsoft, and Qualcomm. Motley Fool newsletter services recommend Apple, Intel, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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