Selling shovels in a gold rush has been a proven strategy. The current "gold rush" is in the smartphone industry. Computing is shifting from PCs to smartphones, which means that those in the best position to benefit from this trend are suppliers/developers to smartphone manufacturers. The launch of the iPhone 5 was the biggest event last week, amid a number of important product launches. Apple's (AAPL) smartphones and tablets make it the most dominant player in the Unites States, with a strong presence in international markets as well. A large roll out for the iPhone 5 is expected this year, with the phone being made available by more than 200 carriers and in more than 100 countries by Christmas.
This supply chain efficiency cannot be achieved without high quality and reliable suppliers. There are a number of different companies that rely heavily on sales of the iPhone 5. We believe that benefits of iPhone 5 sales will trickle down to these Apple partners. The following three companies will be the biggest beneficiaries of strong iPhone 5 sales, beside Apple itself. Investors looking for high returns might not find what they are looking for in AAPL, as the stock is very efficiently priced. Therefore, such investors can turn to the Apple suppliers given below.
(click image to enlarge)
Revenue in Millions
The graph given above shows the phenomenal growth that the iPhone and iPad have seen since their inception. The dip during the current quarter can be attributed to people holding off purchases while waiting for the release of the iPhone 5. If the trend continues, Apple's partners can benefit from high sales of the iPhone 5.
Qualcomm manufactured the MDM6610 chipset and the RTR8605 for the iPhone 4s. The improved connectivity of the new iPhone 5 (4g LTE) requires the use of more hardware from Qualcomm. Analysts are currently estimating that approximately 250 million units of the new iPhone 5 will be sold, according to FBR Capital Markets analyst Craig Berger. The introduction of 4G technology into the iPhone will benefit Qualcomm in other ways as well. Qualcomm is the market leader when it comes to 4G technologies, and the iPhone 5 will significantly increase 4G penetration in the U.S. market, which will directly benefit the company. The main competitors for the iPhone 5 are Nokia's (NOK) Lumia 920 and Samsung's (SSNLF.PK) Galaxy S3. These phones also contain Qualcomm hardware in the form of the snapdragon s4 dual core processor. This is why we still believe Qualcomm is the best-placed technology stock. The stock is currently trading at a forward P/E of 15.8x and P/S of 6x.
Broadcom is one of the biggest beneficiaries when it comes to soaring Apple smartphone sales. Broadcom's parts are used in a number of different Apple products. Most notably, the iPad 3 carries Broadcom's BCM4330, whereas the older model used the BCM4329. According to Bloomberg, Broadcom is one of the biggest suppliers for the iPhone 5. Broadcom's Taiwanese semiconductor manufacturer has increased its sales target due to large shipments to a mystery buyer. According to Bloomberg, that buyer is Broadcom, which is trying to load up before the iPhone 5 hits stores this fall. Furthermore, Broadcom is sticking to its sales targets while other suppliers are cutting their previous estimates due to the sluggish economy. This again shows the impact that the iPhone 5 can have on stakeholders. Currently, Apple is one of Broadcom's largest customers, contributing approximately 11% to its sales. The Bluetooth in the iPod Nano and dual band networking in the new iPod touch will drive up these sales even further. The stock is currently trading at forward P/E of 11x and P/S of 2.8x.
Skyworks Solutions (SWKS)
The company primarily offers mixed signal and analog semiconductors. It also manufactures amplifiers, attenuators, circulators, detectors and diodes. Skyworks is another important semiconductor supplier to Apple. The company manufactures high performance analog semiconductors. The iPhone 3G carried Skywork's quad-band GSM/EDGE PA (power amplifier), and two more skywork PAs were added to the iPhone 4. The 4s also carried the 77464-20 power amplifier made by Skyworks. We believe that the increased power requirements of the iPhone 5 will increase Skyworks' share of the iPhone. The stock has shown more than 240% growth in the last five years, and the company has beat analyst estimates for the past four consecutive quarters. Analysts are expecting EPS of $1.88 for the current year, and $2.17 for September 2013. Past beats prove that, at the very least, the targets will be met. The stock is currently trading at a forward P/E of 13x and P/S of 3.65. If we compare this valuation to the NASDAQ's 15x, we can give a buy rating for Skyworks.