The iPhone 5 And The Sum Of Its Parts

by: Douglas Ehrman

With the much expected release from Apple Inc. (NASDAQ:AAPL) later this month of the iPhone 5, investors are looking at various ways to profit from the launch. While some may prefer to invest directly in Apple, and others choose to bet on the impact the next generation iPhone will have on Google Inc. (NASDAQ:GOOG) - both in terms of its Android ecosystem and devices released by its Motorola Mobility division - or other competitors, considering and investing in the component makers can offer solid exposure with the insulation of diversified business lines. Some commentators take the position that given the needed lead time, component makers have largely benefited from, and priced in, the impact. Given the sales expectations for the iPhone 5, many of these companies should experience a positive impact for several quarters. What follows is a non-inclusive list of some of the component makers and a brief discussion of how each is relatively positioned heading into the release date:

Cirrus Logic Inc. (NASDAQ:CRUS) - After a disappointing earnings report, the company issued guidance that all but confirmed that its participation in the iPhone 5 was a lock. Company CEO Jason Rhode stated: "As such, we expect revenue in the September quarter to grow more than 70% sequentially and continue significant growth in the December quarter." This is a great example of a stock that may have made its move and left investors to wait for the next catalyst. While the company looks solid, with a trailing P/E above 32, it is expensive. Those who already own shares may wish to hold them, but new positions are risky. Overall, the stock rating is neutral.

Broadcom Corp. (BRCM) - If history repeats, Broadcom will provide Wi-Fi and other connectivity for the iPhone 5. While the stock has performed well since mid-July, it still represents a solid option. Though the trailing P/E of 25.9 is a bit rich, the consensus annual EPS growth estimate of 15.5% for the next five years makes a solid case for the stock. Additionally, the company reported recorded revenues of $2 billion in the second quarter, an 8% sequential gain. The stock has good potential at current levels and is a buy on the long-term outlook.

OmniVision Technologies Inc. (NASDAQ:OVTI) - This company, which makes camera sensors, is also expected to play a significant role in the new iPhone. The company recently issued guidance about $100 million above expectations, signaling that its participation in the launch should drive revenues. The stock has traded strongly since mid-July, but did not run on the news. With a trailing P/E above 35, the stock looks a bit pricey and gets a neutral call.

Qualcomm Inc. (NASDAQ:QCOM) - The manufacturer of the chips enabling the much anticipated 4G LTE capabilities, Qualcomm may be the best positioned going into launch. The stock is trading at a 17.9 multiple and has positive catalysts beyond the iPhone 5. Qualcomm is expected to have its chip featured in both the new Windows Phone 8 - a collaboration between Microsoft (NASDAQ:MSFT) and Nokia (NYSE:NOK) - and also in a new Motorola Razr released by Google's Motorola Mobility. The inclusion of the 4G LTE chip is important for the Windows Phone because if it is to gain traction, it will need to compete with the iPhone 5 in all the basics - running on what is considered the premier U.S. network is a minimum. For the Razr, the inclusion of the Qualcomm chip is of particular importance given the existing relationship between Google and Intel Corp. (NASDAQ:INTC). While Intel's chip will likely be featured in Motorola Mobility's European launches, the Qualcomm chip will control the U.S. market. This will give Qualcomm a first-mover advantage, but Intel should be expected to push for a strong showing with an LTE chip of its own in 2013. Based on the strong valuation and diversified options, Qualcomm is a buy at current levels.

Overall, partnering with Apple has historically proven to be a major positive for the companies that make the components. While in some cases, these opportunities have been missed, in others, the stocks look well positioned to perform. As Apple continues to move forward, its commentators either love the company or hate it. In all cases, the stocks that Apple impacts tend to make solid investments if one can figure out the timing.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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