In an article we wrote on March 20, 2012, "Should you buy these 3 soaring Apple suppliers?", we examined the shares of three Apple (AAPL) suppliers: Skyworks Solutions Inc. (SWKS) , Qualcomm Incorporated (QCOM) and Broadcom Corporation (BRCM). At that time, the shares were soaring on a year-to-date basis, having risen 74.29%, 22.5% and 31.1% respectively. We concluded that although they may look attractive, as further appreciation in such shares will have to ride on the fortunes of Apple, investors may be better served by buying Apple shares instead, possibly with the exception of Broadcom which may still be a good long term investment.
Apple 1-Year Chart - Source: Yahoo Finance
Indeed, since the publication of that article, Apple shares have increased by an additional 9.8% from $605.96 on March 20, 2012 to $665.18 on September 26, 2012. Meanwhile, Skyworks Solutions Inc. shares are down 18% from $28.27 to $23.18, while Qualcomm Incorporated shares are down 6.6% from $66.75 to $62.32, and Broadcom Corporation shares are down 11.2% from $38.39 to $34.10. Naturally, these shares fell substantially following Apple's recent announcement that it had sold 5 million iPhone 5 smartphones at its stores during opening weekend as opposed to some estimates of as much as 10 million units. Considering that the share prices of these Apple suppliers have dropped noticeably since March 20, 2012, is it now a good time to dip in?
The current disappointment surrounding iPhone 5 sales is still unfounded. This sales shortfall was driven by limited supply and sold-out inventories. We believe this will create a craving effect by consumers which could actually lead to incremental demand, as long as the supply issues are not permanent. There have been some reports that the iPhone 5 was selling at over 50% premium at $1,100 in grey markets such as in Hong Kong.
Furthermore, the iPhone has retained its luster partly due to the "status" associated with owning such device. The perception of limited supplies feeds the exclusive "rare" effect, which further fuels demand and maintains Apple's "status" symbol. We have discussed this principle in our article published August 15, 2011, "Who will take a bite out of Apple? Anyone? "
Apple has a history of executing well and addressing any shortfall it may have, and hence we believe Apple will address supply issues, and prevent these from snowballing into major supply limitations. As a result, we believe that the future still looks very bright for Apple and its suppliers. However, whether it makes sense to buy Apple suppliers at this juncture will also depend on the current valuations of these suppliers.
1. Skyworks Solutions Inc.
As mentioned in our March article, Skyworks Solutions Inc. develops analog semiconductors including amplifiers, attenuators, front-end modules and other, supporting broadband, cellular infrastructure, energy management, smartphone and tablet applications and more. Its power amplifier modules are used in the iPhone 5. Skyworks' front end module is also used in the iPad 3.
Source: Yahoo Finance
Skyworks' earning expectations are $1.89 per share for the current year ending September 2012, and $2.17 for next year ending September 30, 2013. With current share price at $23.18, that yields P/E ratios of 12.33 for the current year, and 10.68 for next year. In March, the current year P/E ratio for Skyworks stood at 15.1 while next year P/E ratio stood at 13.7.
Skyworks valuations are more favorable today than they were six months ago. Its forward P/E ratio for next year is an attractive 10.68. Meanwhile, although 6 months ago the launch of the iPhone 5 was still unannounced, today it is actually a reality. Investors who agree with our view can potentially benefit by purchasing Skyworks at attractive current valuations. As supply constraints for the iPhone 5 start to ease, we could see a good appreciation in Skyworks shares between now and January 2013.
2. Qualcomm Incorporated
As stated in March, Qualcomm Incorporated provides wireless technology and services, including CDMA technologies, powering the majority of today's 3G devices. Qualcomm's RF power management IC and LTE modem chips are used in the iPhone 5. In addition, three Qualcomm ICs are used in the iPad 3.
Qualcomm 1-Year Chart - Source: Yahoo Finance
Qualcomm's earning expectations are $3.65 per share for the current year ending September 2012, and $4.11 for next year ending September 30, 2013. With current share price at $62.32, that yields P/E ratios of 17.07 for the current year, and 15.16 for next year. In March, the current year P/E ratio for Qualcomm stood at 17.8 while next year P/E ratio stood at 16.1.
Meanwhile, Apple's next year earning expectations are $53.32 per share, yielding a forward P/E ratio of 12.48. Although Qualcomm's forward P/E ratio has dropped slightly from March, it still makes more sense to buy Apple at its current attractive valuation rather than buy Qualcomm, driven by the belief that Qualcomm will benefit further from Apple. There is no question that Qualcomm is driven by more than being an Apple supplier, and investors who see substantial additional upside for Qualcomm relative to its current valuation may still decide Qualcomm shares are attractive at these levels.
3. Broadcom Corporation
As stated in March, Broadcom Corporation offers semiconductor solutions for wired and wireless communication with system-on-a-chip and embedded-software solutions for voice, video, data and multimedia connectivity. Three Broadcom chips are used in the iPad 3, while its touchscreen comptroller is used in the iPhone 5.
Broadcom 1-Year Chart - Source: Yahoo Finance
Broadcom's earning expectations are $2.93 per share for the current year ending September 2012, and $3.09 for next year ending September 30, 2013. With current share price at $34.10, that yields P/E ratios of 11.64 for the current year, and 11.04 for next year. In March, the current year P/E ratio for Broadcom stood at 13.3 while next year P/E ratio stood at 11.9.
Broadcom's valuation is attractive in the current low interest rate environment. Furthermore, such valuation has also improved slightly vis-a-vis Apple since March 2012. With the pending release of the iPad mini, Broadcom also stands to possibly gain additional business from Apple. Investors who share our view could possibly benefit by purchasing Broadcom shares at the current pullback level of around $34 after having closed as high as 36.92 on September 18.
In conclusion, the current environment seems more attractive to purchase some Apple suppliers than it looked about 6 months ago. In the case of Skyworks and Broadcom, forward P/E ratios have dropped and there is potential of further gains in their share price going into January 2013. As for Qualcomm, we still believe it is more attractive to own Apple shares than to purchase Qualcomm as an Apple supplier. However, Qualcomm is also more attractive at current levels than it was in March, and investors who believe in Qualcomm's future as an Apple supplier and beyond could find current valuations relatively attractive.