Apple’s Performance Bodes Well for These Stocks
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Apple’s (NASDAQ: AAPL) impressive earnings caught everyone’s attention last week and raised expectations for their suppliers. When Apple sells 37 million iPhones and 15 million iPads in a quarter, it draws serious attention to its suppliers.
Apple isn’t the sole reason for strong performance from its suppliers, but it does highlight a serious trend. Smartphones are experiencing tremendous growth and Apple is in the pole position. Apple’s blockbuster devices depend on parts from a broad list of chip manufacturers and those manufacturers also provide parts for the rest of the industry, which puts them in a very strong position. Apple’s suppliers include Texas Instruments (Nasdaq: TXN), Broadcom (NASDAQ: BRCM), and Qualcomm (NASDAQ: QCOM), and Samsung, which fabricates designs from ARM Holdings (NASDAQ: ARMH).
Apple is on track to make further gains in the smart phone market after pulling ahead of rival Samsung this quarter. According to Strategy Analytics, Apple commands 23.9% of the smartphone market compared to Samsung’s 23.5%. Apple’s hotly anticipated iPhone 5 has a chance to propel it further into the lead, and its suppliers offer another way to capitalize on future success.
ARM Holdings had impressive earnings for the quarter, with revenue up 21% to $217 million. The company said royalties from their phone and tablet designs now make up 60% of all their royalty revenue. Royalty revenue for the quarter was up 22% to $114.7 on a record of 2.2 billion chips shipped. ARM provides designs for almost the entire smartphone sector and is likely best positioned to profit as a supplier of Apple and everyone else.
Broadcom also reported better than expected earnings for the fourth quarter, posting $1.82 billion in revenue. They beat earnings estimates by $0.03 per share for the quarter. The company also reported annual net revenue of $7.39 billion, up 8.4% year over year, and increased their dividend by 11%.
Broadcom provides the Wi-Fi chips used in most of Apple’s products and is expected to supply their next generation Wi-Fi chips for future Apple products. Broadcom unveiled the chip, which reaches speeds greater than 1 gigabit, earlier this month and it appears Apple is likely to adopt the new standard later this year. Apple has had a long history of incorporating new standards into their products quickly and Broadcom is poised to benefit if they do.
Qualcomm, which supplies the mobile device modem chips that enable cellular connections, is expected to post strong earnings tomorrow after the bell. Qualcomm is also expected to provide the next-wave chips that will allow the iPhone 5 to access both 3G and LTE networks, eliminating one of Android’s current advantages. It will also eliminate carrier specific models, which could be an advantage for Apple.
Texas Instruments also reported a strong quarter, though TI plays a less heralded, but important role in Apple’s devices. TI provides the touch controllers for Apple’s capacitive devices, which isn’t as glamorous as the other offerings, but very important. TI also builds the processor in Amazon’s Kindle Fire and a plethora of other devices.
The advantage of investing in the suppliers is that their parts find their way into the competition as well. If Apple falters, one of the other smartphone manufacturers is likely to pick up the slack and keep order books strong. Explosive smartphone growth is a rising tide that should raise all ships.
I’m bullish on the whole sector, and consequently all stocks mentioned in the post. I think each warrants further investigation but I expect them to perform well going forward, particularly as smartphone adoption continues.
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