Cramer's Mad Money - Hey Apple: Chips Are Not a Commodity (4/30/09)

Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Thursday April 30.

CEO Interview: David Aldrich, Skyworks Solutions (SKWS), Apple (AAPL)

Chips are a hot "commodity" although Skyworks CEO David Aldrich would not agree with that statement. On "threats" from Skyworks' client Apple that it is going to start making its own chips for the iPhone, Aldrich insists that chips are not commodities that can be made by just anyone and Skyworks chips will still be in demand. Complex technology requires more advanced chips and Skyworks is still the leader in this industry. Aldrich also told Cramer that inventories are down and in line with customer demand and its balance sheet is clean. Cramer recommends Skyworks.

Starbucks (SBUX), First Solar (FSLR), Dow Chemical (DOW), Owens Illinois (OI), NYSE Euronext (NYX), International Paper (IP), Apple (AAPL), Research in Motion (RIMM), Google (GOOG), Amazon.com (AMZN)

It looks like businesses are doing everything right with all of the upswings this earnings season, but Cramer observes that cost-cutting is the main secret behind the successes of stocks like Starbucks and the NYSE Euronext, which will only really improve when the economy actually recovers. First Solar was an exception to this rule and actually saw dramatically improved sales, but the reason Cramer said he didn't see the potential upside in Dow Chemical, a company' whose CEO Andrew Liveris appears on the Wall of Shame, and Owens Illinois was because he couldn't predict the extent of the cost cutting measures these companies have undertaken. However, Cramer's four horsemen of tech, Apple, Research in Motion, Google and Amazon saw genuine growth. "Make no mistake, these earnings had nothing to do with business getting better," said Cramer.

Watsco (WSO)

Cramer disputed a Piper Jaffray downgrade of Watsco, the country's largest distributor of heating and cooling equipment, from a buy to neutral. Cramer cited Robert Toll's bullish statements on Mad Money as indication of a housing turnaround by this summer and likes Watsco as a play on Obama's stimulus plan which calls for energy-efficient heating and cooling systems. He explained it is a matter of perspective; the analyst sees a stock that is up $14 from its low but Cramer sees a stock that is $18 lower than its September 2008 highs. He also likes the stock's 4.4% yield and expects Watsco to move back to its September 2008 high of $61.

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Comments

[Timeline St...:]

Consider the context in which Apple operates. If they lack the capacity to design and fabricate their own chips, then they either: (1) subject themselves to whims of market pricing, long lead times, process runs of millions and millions of units; or (2) partner with, and pre-pay, a supplier who will dedicate capacity to Apple's specific needs.

Either way, they are effectively held hostage by chipmaking capacity, which is theoretically able to be purchased by any company. In that sense it is a commodity.

Apple is thinking many years ahead with this move. The basis of their strategy is that the separation between semiconductor and device manufacturers hurts product development cycles, as the device manufacturers are subject to the above dynamics. They will be able to design, produce, and test chips with extremely fast turnaround, and greatly speed the development cycle.

This will turn out to be a big deal.

May 01 09:46 AM

[Econ 101:]

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May 01 12:06 PM

[Camden:]

Re: "This will turn out to be a big deal."

I would add "... for Apple."

Of course how big a deal it becomes depends on Apple's ability to produce "more capable" chips in a timely, cost efficient manner.

Apple continues to up the ante for the competition. That bodes well for Apple and it's shareholders.


On May 01 09:46 AM Timeline Strategy Consulting wrote:

> Consider the context in which Apple operates. If they lack the capacity
> to design and fabricate their own chips, then they either: (1) subject
> themselves to whims of market pricing, long lead times, process runs
> of millions and millions of units; or (2) partner with, and pre-pay,
> a supplier who will dedicate capacity to Apple's specific needs.
>
>
> Either way, they are effectively held hostage by chipmaking capacity,
> which is theoretically able to be purchased by any company. In that
> sense it is a commodity.
>
> Apple is thinking many years ahead with this move. The basis of their
> strategy is that the separation between semiconductor and device
> manufacturers hurts product development cycles, as the device manufacturers
> are subject to the above dynamics. They will be able to design, produce,
> and test chips with extremely fast turnaround, and greatly speed
> the development cycle.
>
> This will turn out to be a big deal.

May 01 12:08 PM