Avoid this Supplier as Apple Sales Decline

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

Bearishness in Apple is creating an opportunity for investors interested in the company's component suppliers. When Apple traded below $400 intraday, the decline was based on worries from an analyst that the company had high iPhone channel inventories. Wal-Mart and AT&T also said they would cut the price of the iPhone 5 to $129 on a 2 year contract. Apple, along with suppliers, sold off in recent sessions as a result.

Supplier Sell-off

Cirrus Logic (NASDAQ: CRUS) and Skyworks (NASDAQ: SWKS) were the biggest decliners over the last year. Cirrus supplies analog and mixed-signal integrated circuits to a number of industries, but its growth relies on Apple. Cirrus supplies audio chips for Apple’s mobile devices--in fact, up to 90% of its revenue comes from Apple.

<img alt="" src="http://media.ycharts.com/charts/115552d1290938013a0b1366707246f5.png" />

AAPL data by YCharts

In April, Cirrus warned the market that quarterly results would not meet expectations. The company expected to write down inventory and blamed a single customer for its lowered outlook.

Skyworks sings a different tune for investors. The company, which makes analog semiconductors, started the year with a strong forecast. Skyworks expected positive momentum to be supported from product ramps and growth from new product categories. This countered the normally slower seasonality in the early part of this year. The company supplies the quad band module for Apple, but also counts Samsung, an Android phone maker, as a customer.

These Suppliers outperform

NXP Semiconductor (NASDAQ: NXPI) and OmniVision (NASDAQ: OVTI) are giving a positive return in the past year, and for good reason. OmniVision earned $0.31 a share last quarter, beating estimates by $0.01 per share. Sales were also higher ($336.2 million compared to consensus estimates averaging $318.3 million). The company also forecast sales and earnings higher than consensus. It was clear that the company’s fortunes are not tied solely to Apple hardware sales.

NXP Semiconductor makes NFC chips for many mobile devices, and does not rely on Apple alone. The “emerging ID” business is a growing segment NFC chips, where NXP is practically the sole supplier. Design wins for more mobile tablets and smartphones will support positive growth for the semiconductor company in the quarters ahead.

NXP still faces risks. Qualcomm entered the NFC market recently, and the Snapdragon S4 processor maker could release an NFC chip in mass volume for device makers by the third quarter of this year. Integrating the NFC chip would give Qualcomm and edge. The chip giant also has a large market share for smartphone processors, and Qualcomm could leverage that strength to win sales for NFC chips.

Foolish Bottom Line

When a company relies too heavily for sales on a single customer, that is a red flag. This means that the companies discussed, such as NXP, Skyworks, and OmniVision are good investing ideas. Negative news around Apple could pull down these companies, creating a buying opportunity. One company to avoid is Cirrus Logic. Cirrus Logic relies too heavily on Apple for its fortunes, whilst the other suppliers have a broader customer base. As sales slow for Apple, due to expectations for an iPhone 5 refresh, Cirrus Logic shares will be hurt the most.

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Chris Lau has no position in any stocks mentioned. The Motley Fool recommends NXP Semiconductors . The Motley Fool owns shares of Cirrus Logic. 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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