By Jayson Derrick
While all the bulls and bears are arguing over Apple's (AAPL) direction, I decided to investigate four technology suppliers that count Apple as an important client. The four companies I have selected are leaders in their own domain and are left out of the spotlight and overshadowed by what many investors consider a very expensive Apple share price. There is tremendous optimism over Apple's suppliers as new iPads and iPhones will enter the market and investors can buy stock in these companies as they have "exposure" to Apple . Steven Pelayo, regional head of technology research at HSBC, said he recommends investing in companies that have exposure to those particular products. I originally suspected these companies will either grow or fall with Apple, but I was surprised that this is not necessarily the case as many have exposure to other product lines outside of the "iFamily".
Apple's quarterly results were a disappointment as iPhone shipments were a reported 47.8M units, lower than expectations of 48.3-50M. Revenue was below estimates, which caused many investors to hit the sell button sending Apple shares down 10% following their quarterly release.
For the purpose of this article, I am not concerned with corporate growth for Apple, but focusing on the undisputed fact that iPhone and iPad will remain the market leader. Investors need to understand that the smartphone and tablet market is still expected to grow 20-24% annually. If the iPhone and iPad loses market share to their largest competitor and rival Samsung, at the very minimum the growth prospect of Apple products should be at least 15%. With all that being said I have explored four companies that are tied in to Apple's supply chains.
Skyworks Solutions (SWKS)
Skyworks Solutions manufactures semiconductors and radio frequency (RF) for the use in mobile communications systems. The company can boast that their wireless radio components are used in every product within the iFamily, including the latest iPhones and iPads. Outside of the iFamily, Skyworks claims to be the leading provider of power amplifiers and brings a cost advantage to the market which allows it to server a broader set of handset original equipment manufacturers (OEM). Skyworks has the breadth of product offerings to play to the trend towards fully integrated RF solutions. More importantly, Skyworks is adding to their product offering in areas beyond RF such as analog components which allows the company to serve a larger and faster growing market than handsets alone
Exposure to Apple: Skyworks Apple exposure is approximately 29%, balanced by Samsung at approximately 17%. In a hypothetical world if Skyworks had no exposure to Apple in 2011, their revenue for the year would still be higher than what was reported in 2010.
Bottom Line: With an expanding product offering and expanding into new verticals Skyworks can continue growing without being fully dependent on Apple as they are hedged with exposure to Apple's biggest competitor, Samsung and an intimate co-marketing relationship with the world's largest chip designer Qualcomm (QCOM).
Avago Technologies Limited (AVGO)
Avago Technologies provides a range of analog, mixed signal and optoelectronic components and subsytems to more than 40,000 customers. Avago is highly leveraged to smartphone growth and should grow faster than other supplies. Handsets account for 42% of revenues, but optical components and application-specific integrated circuit (GM:ASIC) should provide above sector growth.
Exposure to Apple: Avago's commitment to Apple, demonstrated by its decision to build a power amplifier (PA) adjacent to its research facility in Colorado Springs, reflects a long term arrangement between the two companies. Avago has become a steady, reliable supplier as the company has ample capacity to serve Apple's future needs.
Bottom Line: Avago has picked up a lot of credit from analysts. The company will gain as ASICs offer higher margins than standard fiber components. The segment has languished as inventories continue to be worked down, but if economic conditions gradually improve this will help Avago throughout 2013. Samsung represents 7-8% of Avago's business and counts many other companies as clients. Avago will benefit as other phone models are ramping up their products. The company boasts a large sales force focused on supporting large OEMs such as Cisco Systems (CSCO), Hewlett-Packard (HPQ), International Business Machine (IBM), and many technology giants.
RF Micro Devices (RFMD)
RF Micro Devices designs and manufactures high performance radio frequency systems and solutions for applications that drive wireless and broadband communications. RF Micro has switched its strategy recently to focus on collaboration with leading chipset providers as well as the new market leaders and appears to be well positioned to rebuild its presence in PAs. The company also has the breadth of product offerings to evolve towards a provider of fully integrated solutions.
Exposure to Apple: RF Micro can count Samsung a larger client representing approximately 25-30% of revenues with Apple accounting for 12-15%. RF Micro has two parts (RF1101 and RF1102) in the iPhone 5. Apple will take the helm as the RF Micro's second largest client, a big upgrade over Nokia (NOK) and Research In Motion (RIMM).
Bottom line: The company recently announced quarterly revenue of $271M way above analyst estimates of $246M. Consensus earnings for 2013 and 2014 are increasing steadily as their stock passed the $5 mark following their announcement A Cantor Fitzgerald report was very bullish on RF Micro "with expanding margins, we find the shares attractive and suggest investors aggressively accumulate them."
TriQuint Semiconductor (TQNT)
TriQuint Semiconductor designs, manufactures and supplies high-performance RF modules, components and foundry services. TriQuint is one of only two bulk acoustic wave (BAW) providers (along with Avago) and is selling out those parts and adding more BAW capacity. Demands on communications infrastructure and specialty products for military and aerospace add to TriQuint's long term prospect and investment profile.
Exposure To Apple: TriQuint had early success with Apple, but could not meet the required volume of component orders. TriQuint added capacity, but saw its role in the iPhone diminish. The company is recovering as the industry's need for filters expands.
Bottom Line: TriQuint is rebuilding their business based on new products. Doubling BAW capacity over the next year should create upside margin potential. High-margin networks and defense segments should also help to boost margins.
RF Micro Devices learnt a hard lesson in 2011 when their largest client Nokia experienced rapidly declining sales. The company was forced to lay off employees and was a wake up call for companies not to be so dependent on Apple. I believe that the companies I have listed should be a good investment consideration when factoring in the reality that these companies have a diversified product offering as they have capacity to grow with Apple or Samsung… or both.