How Apple's Fortunes Affect Other Stocks

By Stephen D. Simpson, CFA | October 25, 2012 AAA

To a certain extent, financial media these days is "all Apple (Nasdaq:AAPL), all the time." When you consider the significance and impact of Apple's performance and health on the entire market ecosystem, that level of attention doesn't seem quite so outlandish. For better or worse, the health of Apple shapes the fortunes of a large number of stocks and to some extent, the markets themselves.

The Chip, Phone and Carrier Ecosystem
As Apple makes virtually nothing on its own, a large number of chip and component suppliers rely on Apple for varying percentages of revenue and stock market capitalization.

Broadcom (Nasdaq:BRCM) is a company with over $7 billion in annual revenue, but 13% of that goes to Apple. Likewise, the even larger Qualcomm (Nasdaq:QCOM) also gets a meaningful percentage of revenue from this one company, as is the case for a large number of chip companies, such as Skyworks (Nasdaq:SWKS), Triquint (Nasdaq:TQNT) and OmniVision (Nasdaq:OVTI). In fact, estimates suggest that Apple buys close to 10% of all chips manufactured on the planet.

Looking at it another way, those chip companies with sizable exposure to Apple have been among those stocks that have done relatively better at a time when chip stocks in general have been struggling through weak end markets in PCs, consumer electronics, industrial and communications hardware.

The opposite has also proven true, as losing Apple's business has driven down more than a couple of stocks. Audience (Nasdaq:ADNC) plunged nearly two-thirds when management told investors that the iPhone 5 was not going to use its technology. The stock of OmniVision has likewise gone on a roller coaster, as investors wavered between optimism and fear that the company's imaging sensors would be included in the next iteration of the iPhone. Even Linear Technology (Nasdaq:LLTC), a large and very diverse analog chip company, saw its stock batted around when management opted to preserve margins and let Apple's business go.

Apple also has significant influence on other phone and network operators. Following closely in Apple's footsteps (and, according to a recent patent ruling, a little too closely) has propelled Samsung into smartphone royalty, while Apple's success has sent the fortunes of Nokia (NYSE:NOK) and Research In Motion (Nasdaq:RIMM) into a tailspin.

Market Cap Means Market Influence
Apple's size also lends it major significance in the stock market. Within the much-followed Nasdaq composite, Apple appears to have a weighting of over 12% (Nasdaq does not openly publish its weightings, but the Fidelity Nasdaq Composite Tracking Index ETF (Nasdaq:ONEQ) gives it a 12.5% weighting). Within the Nasdaq 100 and the very popular PowerShares QQQ (Nasdaq:QQQ) ETF, the weighting is a whopping 19%. It goes further than this, though. If you include those chip and tech companies with meaningful revenue exposure to Apple, the weighting influence in the QQQ goes up to roughly 25%.

Along similar lines, Apple has morphed into a sort of bellwether for technology and consumer devices. With almost 10% of the semiconductor's output going to Apple and over $440 billion of institutional investment dollars committed to the stock (not to mention options, short positions and so on), it stands to reason that it should be. After all, it looks as though roughly 1% of global institutional assets under management are in Apple's stock

Setting the Tone and Framing the Argument
Alongside Apple's significant status as a chip customer goes its strong influence as a trendsetter and business mover in a variety of markets. Apple has significantly changed the wireless business. Having exclusivity on Apple's iPhone was a big deal back in the day, and there have been plenty of stories speculating that Verizon (NYSE:VZ) and AT&T (NYSE:T) are trying to regain control of the market. Along similar lines, the idea of a chain of Nokia or Samsung retail stores would have seemed ridiculous 10 years ago, but Apple's retail stores have taken traffic, control and profits away from Verizon as well as electronics retailers, such as Best Buy (NYSE:BBY), that once looked at wireless phones as a lucrative profit source.

Apple, likewise, forces its rivals to play along with rules it gets to write. Again, looking back to the patent fights between Apple and Samsung, it looks as though following (or copying, depending upon your perspective) Apple is about the only way to reliably succeed in smartphones. Apple's success seems to have goaded rivals such as Hewlett-Packard (NYSE:HPQ) into wasting considerable resources in developing competing products.

The Bottom Line
Whether an investor looks at the revenue, the market cap or its market share in markets such as smartphones and tablets, Apple wields significant influence. History suggests that this won't last, but for now, Apple affects a long chain of suppliers, rivals and related players. With that sort of industry and market position, it's fair to say that what's good for Apple is good for the market, at this point in time.

At the time of writing, Stephen D. Simpson did not own shares in any company mentioned in this article.

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