The past few months have been turbulent ones for Apple (AAPL) investors. While tax-selling has played a role in Apple's recent slide, we believe that it is impossible to deny that worries over Apple's competitive positioning and product roadmap have played a role. Apple's Q1 2013 (fiscal) earnings release, currently set for January 23, will be one of the company's most anticipated earnings in years, and is likely to be the most important technology sector earnings report. Investors are likely to scrutinize the company like never before to see if CEO Tim Cook will be able to steer the company forward without Steve Jobs. While we believe that concerns regarding Apple are unfounded, and have been using Apple's recent decline to add to our position in the company, not all are convinced that this is the case. Investors will be looking for any and all clues as to what Apple will report on January 23, and a look into its supply chain may yield some answers.
Excluding Several Suppliers
Unfortunately, several of Apple's suppliers have either already reported their most recent quarterly results, or will report them after Apple. However, that does not mean that their results do not yield insight into the state of Apple's business. The suppliers we will cover in this section include Broadcom (BRCM), ARM Holdings (ARMH), Multi-Fineline Electronix (MFLX), and Qualcomm (QCOM).
- Broadcom: Broadcom's Q4 results are tentatively set to be reported on January 27, meaning that they will arrive too late to be of use in analyzing Apple's earnings. However, Broadcom raised its Q4 2012 guidance at the beginning of December, and the company specifically cited its wireless division as the reason for raising guidance. Broadcom raised the midpoint of its quarterly revenue guidance from $2 billion to $2.05 billion, and raised its gross margin forecast from flat to up slightly. Given that Broadcom is a key supplier to Apple, this raise in Q4 guidance could be indicative of better than expected trends at Apple. The risk is that Samsung is also a key Broadcom customer, and improvements at Broadcom could be due to stronger than expected results at Samsung, not Apple.
- ARM Holdings: ARM is set to report its 2012 results on February 5, meaning that they will arrive too late for investors to use in an analysis of Apple's upcoming earnings.
- Multi-Fineline Electronix: The fact that 66% of Multi-Fineline's revenues come from Apple means that the company's results need to be examined when predicting Apple's earnings. Multi-Fineline's fiscal Q4 ended on September 30, 2012 (one day after Apple), and during that quarter, the company's broke even on an EPS basis, not something that is usually seen from an Apple supplier. However, when these quarterly results were reported in early November, Multi-Fineline reiterated the fiscal Q1 guidance it provided in October. Specifically, Multi-Fineline is forecasting record revenues ($270 million at the midpoint of guidance), with CEO Reza Meshgin stating that, "the balance of our new program ramps are proceeding as planned and our labor utilization has improved. We now expect a significant gross margin rebound in the first quarter of fiscal 2013. In addition, we completed our capacity expansion project in September which positions us to drive record revenues during the first quarter of fiscal 2013, and support the strong demand forecasts we are seeing from our existing and newer customers for the balance of fiscal 2013." Multi-Fineline's fiscal Q1 aligns with Apple's fiscal Q1 (both are set to end in December), and the midpoint of its guidance range ($260-$280 million) implies sequential growth of 33.94%, and year-over-year growth of 12.81%. Multi-Fineline announced preliminary Q1 2012 results in early January, ahead of Apple's Q1 2012 earnings, and it is possible that this year will see a repeat of this scenario, giving investors an early look into Apple's business.
- Qualcomm reports its Q1 2013 (fiscal) results on January 30, meaning that they will come too late to be used in an analysis of Apple's earnings.
Skyworks Solutions: The Lone Major Supplier
With ARM Holdings, Broadcom, Qualcomm, and Multi-Fineline unable to provide material new insight into Apple's earnings before the company releases its earnings, this task falls to Skyworks Solutions (SWKS), which supplies power amplifiers for the iPhone. Skyworks is set to announce fiscal Q1 2013 earnings on January 17 (Q1 2012 earnings were announced on January 19, 2012), and the current consensus estimate (provided by Reuters) for Skyworks is to report EPS of $0.54 on revenues of $450.6 million.
Estimated EPS of $0.54 implies year-over-year growth of just 5.88% on a non-GAAP basis, a potentially alarming signal. However, revenues are set to grow by 14.44%, implying that the EPS issues at Skyworks could be internal, given that projected sales growth is outpacing projected earnings growth. Annualized estimates for Skyworks' fiscal 2013 and 2014 show that any issues in this quarter are likely temporary.
Fiscal 2013 earnings are set to grow by 11.05% to $2.11 per share, and by 16.11% in fiscal 2014.
Apple's investors must remain vigilant over the next several weeks, and be aware of any preannouncements from Apple's major suppliers. In particular, Apple investors should be on the lookout for preliminary Q1 2013 results from Multi-Fineline, as well as Q1 2013 earnings from Skyworks (we believe it is essential for Apple investors to listen to Skyworks' earnings call). And we believe that Apple's guidance could very well matter more than its earnings. The hysteria that has surrounded Apple over the past several months has lowered expectations for Q1 results, and analysts have already reduced their estimates for Q1 2013.
In our view, Apple's sellof has been overdone, and few of the headlines regarding the company better illustrate this fact that the debut of the iPhone 5 in China. On December 14, Apple plunged as analysts were quick to point out that the iPhone 5 had met a "cool" reception in China, due to a lack of lines at the country's Apple stores. However, Apple announced on December 16 that it had sold 2 million iPhone 5's in China. The reason that there were few lines at Apple stores in China was due to the fact that there were riots when the iPhone 4S went on sale, forcing Apple to move more of its distribution online in order to preserve public safety in the face of insatiable demand for its products. The iPhone 5's launch in China is even more impressive when viewed in the context of the country's 3G subscriber pool. As ISI analyst Brian Marshall notes, the iPhone 5 was sold to about 1% of the U.S. postpaid wireless market (around 200 million subscribers) within the first 10 days of sales. And in just 3 days, Apple has managed to sell the iPhone 5 to 1.5% of China's 3G market (currently estimated to be around 150 million subscribers).
We have been using Apple's recent selloff to add to our position in the company's stock. We think that this selloff is overdone, and that any perceived weakness in Q1 is largely priced in. We are confident that CEO Tim Cook will be assertive on the company's earnings call, and can articulate that Apple's best days are not behind it. There has been a good deal of criticism levied at Apple, even though the company has not released any holiday quarter earnings that can be criticized. Based on its January 2, 2013 closing price of $549.03, Apple has lost over 22% of its value since hitting an all-time high of $705.07, something we believe is excessive. A confluence of factors has served to drive down Apple's stock price, and the company's trademark silence has amplified the issue, for investors must wait until Apple reports its Q1 earnings to hear from the company's executives about the state of business. As Argus analyst Jim Kelleher notes in his latest note on Apple, "the decline in the stock far outstrips any change in the fundamental outlook, even assuming some modest deterioration from earlier inflated expectations." We agree with this analysis, and believe that investors who remain with Apple will be rewarded for their conviction in the face of a myriad of negative headlines and conjecture.