Chips and Dips; Apple's Mysterious Increased iPhone Order

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Includes: AAPL, SMH, WDC, ZRAN
by: Shlomi Cohen

The Semiconductor HOLDRs (AMEX:SMH) trust issued receipts are up over 10% for the year. Lazard Capital Markets analyst Daniel Amir explains that while a rebound is felt among chip companies, it is due more to increased production after inventories emptied out, and less to significant strengthening demand among sales chains.

Amir estimates that if demand won’t improve ahead of the back-to-school season during the summer, and holiday purchases toward the end of the year, we’re likely to return to the situation at the end of 2008, that is, a wave of profit warnings and lowered guidance among chip firms. In the meantime, the current strengthening is bringing with it a wave of raised recommendations and forecasts from beaten down chip companies. Amir himself had amazing timing in raising his recommendation on SanDisk Corporation (Nasdaq: SNDK) to “Buy”, following which the stock rose 71% in the three weeks since.

Another Israeli chip company that merited raised recommendations is Zoran Corp. (Nasdaq: ZRAN), which on Friday was given a target price of $11, instead of the previous $8, by Oppenheimer analyst Yair Reiner, who rates it a "Buy". Reiner notes that inventory at sales channels in the sector are low, specifically in Zoran's strong niche market, digital television, which accounts for one-third of its sales. There may even be a temporary shortage. Despite an expected improvement, the deep recession will continue to hurt Zoran this year as well, but with a safety cushion of $7 per share in cash, which he expects the company to have at year-end despite losses, he gets to a new target price.

Financial weekly Barron's quotes Seligman fund manager Paul Wick, considered one of the major investment managers in the technology sector, who said simply that someone who is looking for a large technology company, at a cheap price, without having to bet on when the recession will end, should look at Apple (Nasdaq: AAPL). Apple has $31 per share in cash, and generates about another $8-9 per share in cash each year. Additionally, he claims, based on what he says are good sources, Apple has ordered from its Taiwan sub-contractors double the quantity of iPhones for second quarter delivery as it did for the first quarter of this year.

If Wick is correct about the increased number of iPhones, then there are apparently increased orders because of an imminent signing by Apple with a Chinese telecommunications company. It’s a potentially giant market for Apple, and rumors have it that China Unicom will be the first to sign, and it will happen quite soon.

Bank of America analyst Scott Craig, who covers Apple, estimates that Apple can capture at least 20% of the smartphone market in China. If the launch in China happens in the middle of the year, he forecasts that by the end of the year Apple will able to sell around 1.5 million iPhones there, 4.6 million in 2010, and he sets a target for 2011 of 5.8 million handsets.

Published originally by Globes [online], Israel business news - www.globes.co.il

© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.