Apple’s Newest Suppliers-Should You Invest?

By Karen Rogers - September 17, 2012 | Tickers: AAPL, MU, TOSBF | 0 Comments

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With Samsung (SSNLF) being phased out of Apple’s (NASDAQ: AAPL) universe, a new crop of component suppliers has come on board.  Apple is the world’s leading chip buyer and these companies should be kept busy producing enough chips to meet the tech giant’s demands.  The financial health of the three companies Apple selected to replace Samsung is summarized in the following chart.

Toshiba (NASDAQOTH: TOSBF), the company that created the NAND flash chip and the second largest producer of them, counts SanDisk and LG Electronics among its major customers along with Apple.  More than half of Toshiba’s NAND chips currently produced end up in iPhones, and in April 2012, the company announced plans to build a new NAND production plant in Japan.  Toshiba is also unveiling a line of tablets based on Windows 8 and Windows RT at a Computex computer trade show this month.

For Toshiba, new Apple contracts couldn’t have come at a better time.  Toshiba’s annual revenue fell from $81.7 billion in 2011 to $77.9 billion in 2012 and the company is looking at Apple orders to boost their sales and revenue.  But the company is still struggling to control their increasing cost of goods sold expenses, and net income fell from $1.76 billion to $941.9 million, respectively.

Elpida Memory filed the Japanese version of bankruptcy back in February this year after seeing its’ business decimated by falling semiconductor prices and failing to secure a second bailout from the government.  Semiconductor prices fell 85% with the DRAM benchmark chip, the DDR3 2-gigabit, plunging from $4.85 in September 2010 to $0.71 in November, a situation that was exacerbated by the strong yen.  The company was unprofitable for the past 5 consecutive quarters, is currently saddled with over $5.5 billion dollars in liabilities, and isn’t sure it can meet current chip production commitments. 

So why would Apple do business with Elpida?  Because Micron Technology (NASDAQ: MU), the third largest manufacturer of NAND flash chips, announced it was buying Elpida for $750 million in cash and $1.75 billion in future periodic payments, and Apple already is a big Micron customer.  If approved by U.S., Japanese and Taiwan regulators, the deal could close by mid-2013 and make Micron the second-largest DRAM chip maker behind Samsung.  

SK Hynix is the fourth-largest NAND flash chip manufacturer.  To meet new demand, the company is investing $1.8 billion this year in four new semiconductor fabs which should substantially increase their NAND chip production. SK Hynix wants to increase their NAND chip revenue share from 20% to 30% this year.  But the company has not been able to get control of either their sales, general and administrative expenses or their cost of goods sold expenses.  The result has been a decrease in revenue from $10.718 billion in 2010 to $9.209 billion in 2011, and caused a sharp fall in net income from $2.346 million to a net loss of -$50.2 million, respectively. 

The semiconductor sector still hasn’t recovered from the 2010 price collapse and investors should keep that in mind when weighing the merits of buying a company’s stock.  Analysts are looking at Apple, Google, Microsoft and others to jumpstart a sector recovery, which is fine as long as global chip demand continues to increase.  With Apple ramping up production for new iPads, iPhones and Macs, investors may find that the best profit opportunities lie with the tech giant’s new stable of chip suppliers.

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