Despite Apple Inc.’s (AAPL) big stock jump this week, the outlook for several of its suppliers remains bearish, signaling potential downside for shares of semiconductor manufacturers including Cirrus Logic Inc. (CRUS), Skyworks Solutions Inc. (SWKS), and Qorvo Inc. (QRVO). The caution on these three suppliers comes from their dependence on one large customer, increasing risk and making the group of stocks more volatile than their better-diversified peers. All three of these chip makers rely heavily on Apple for revenue, in particular from the iPhone, which is expected to see demand decelerate again in Apple’s current quarter.
While these same stocks once benefited from past Apple “super cycles” in which new generations of products would create a tail of wealth for suppliers, the breakdown of that cycle, and forecasts for falling or weaker iPhone sales, is now having the opposite effect. Earlier this month, the Cupertino-based tech giant slashed its revenue target, attributing weakness to lower-than-expected sales of the iPhone, which has been plagued by high inventories and weak emerging-market demand, per Barron’s.
3 Apple Suppliers May Face More Declines
(% Below 52-Week High)
- Cirrus Logic Inc.; 25.6%
- Skyworks Solutions Inc.; 36.5%
- Qorvo Inc.; 24.5%
Smartphone Market Matures
Despite Apple stock's 5.5% rally on Wednesday, shares remain 30% below their 52-week high, weighing down Barron’s index of 50-plus Apple suppliers 33% from their 1-year peak. Barron’s estimates $300 billion in market value has been shed from Apple suppliers since iPhone demand weakness surfaced.
Apple’s warning earlier this month followed warnings from chip makers including Qorvo, who said in mid-Nov that revenues would fall short of forecasts, and Skyworks, which offered disappointing guidance just a week prior.
The iPhone maker’s most recent quarterly results posted on Tuesday night offered insight into the firm’s core business as it struggles with longer replacement cycles. Apple now expects to sell $57 billion worth of goods, $900 million less than the analysts' average forecasts, as the firm doubles down on its burgeoning software and services businesses. As the smartphone market slows, suppliers will have to wait longer for component orders to recover.
“Despite opportunities for content gains, we think it will be extremely challenging for Apple supplier stocks to work in the current cycle,” wrote KeyBanc analyst John Vinh, acknowledging the possibility for suppliers to produce a larger portion of the parts in Apple’s devices.
One Bright Spot for Chip Makers
Cirrus generates 82% of its sales from Apple, followed by Skyworks at 47%, and Qorvo at 36%. Meanwhile, chip maker Broadcom Inc. (AVGO) is an example of an industry player that has became less risky because of its successful diversification away from the mobile-phone market. Today, it derives 25% to 34% of its sales from Apple, per Barron's.
While Broadcom is far from immune to iPhone weakness, Vinh views the stock as an attractive bargain buy, citing management’s ongoing strategy to strengthen its resilience by diversifying its business.
Shares of the San Jose, Calif.-based chip maker have rebounded nearly 22% over three months, compared to the S&P 500’s 1.5% loss over the same period. Despite the rally, Broadcom shares still trade less than 12 times estimated 2019 earnings. At that level, the stock reflects a 18% discount compared to its historical valuation multiple.
Meanwhile, Broadcom management has championed an aggressive M&A strategy, completing its takeover of software maker VA for $18 billion in November.
Saving Emerging Markets Requires ‘Full-Time Commitment’
Sidarth Kapoor, a portfolio manager at Avasar, suggests that for the iPhone maker “to win India it requires a full-time commitment and investment,” one that Apple is unlikely to offer. “They can’t sell outdated iPhones at discounted prices to win over Indians who can choose from a plethora of suppliers,” he added.
Not all chip makers remain at the mercy of Apple’s iPhone. Suppliers like Broadcom, and others who are actively diversifying, may escape the full effect of Apple’s woes. In early December, both Taiwan Semiconductor Manufacturing Co. (TSM) and Foxconn Technology Co Ltd., reported solid sales results, indicating that many chip makers may still have long-term potential. Additionally, if Apple manages to get its hold on emerging markets and revamp product demand, its suppliers could see sales, and their stock prices, make a comeback.