The much-hyped Apple (AAPL​) iPhone 8 will most likely be unveiled in September, and as expectations grow so does Apple's market cap. Shares of AAPL are up a whopping 18% in 2017, due to better-than-expected fourth quarter results as well as iPhone 8 hype. The unveiling of the iPhone 8 will mark the 10th anniversary of the original iPhone, and the tech marketing cyclone will spin faster and faster the closer we get to September. Naturally, Apple won't be the only company to benefit from the device, and two key suppliers are right in the eye of the storm: Broadcom (AVGO​) and Skyworks Solutions (SWKS​). Skyworks is already up almost 30% year to date, while AVGO is up nearly 21% YTD.

All three stocks have plenty more room to run. From now until the release of the gadget, rumors and reports on the look, feel and bill of components of the iPhone 8 will add more and more kindling to the fire of enthusiasm. However, it is not necessarily simple to divine how tied these two key suppliers are to Apple, but if you dig deep enough and read between the lines, you can begin to quantify the Apple impact.

Let's start with SWKS's 10-K for the fiscal year 2016, in which the company provides the following geographical breakdown:

As you can see, China is a significant source of revenue for SWKS. The 10-K goes on to note that revenue by region does not necessarily correlate to the end market for the company's products. Later in the 10-K, SWKS discloses that Foxconn and Samsung each accounted for more than 10% of revenue in both 2014 and 2016. It also pointed out that Foxconn was greater than a 10% revenue customer in 2015 as well. 

The asterisk in the chart above indicates that in 2015, company B was not a 10% revenue customer. We can say with confidence that company B is Samsung, making company A Foxconn, because Foxconn — as noted above — was a greater-than 10% revenue customer in 2015. Further confirmation arrived on the Skywork's fiscal fourth quarter conference call, when management confirmed Foxconn represents about 40% of the company's revenue (Foxconn assembles nearly all iPhones).

On Skywork's fiscal first quarter conference call, the CEO confirmed that Huawei had become the company's second largest account. Skyworks management also said that China represents about 20 to 25 percent of the company's total revenue. In a separate geographical table, China is shown comprising 73% of total income in fiscal 2016. With Foxconn representing about 40 percent of revenue, the balance of the China revenue comes from companies such as Huawei and others. In addition, management also noted that Samsung fell just below the 10% of revenue mark in the fiscal first quarter of 2017.

Why so much fine-grained detail? First of all, because during the pull-back in August 2015 and January 2016, shares of SWKS were among the most severely impacted by fears of a China slowdown. However, we now know that SKWS has only 25% or so of its revenue coming from China. Second, it helps us beginning to realize that as Samsung bounces back, it too will most likely become a greater than 10% revenue customer again, leaving Huawei and Samsung with at least 20% of total revenue. This diversification will reduce Apple to a smaller overall share of SWKS's total revenue.  

AVGO spells things out a bit more clearly than SWKS regarding its involvement with Apple, but there are still a lot of moving pieces. In its 10-K, AVGO mentions that Foxconn accounted for 14% of its total revenue in 2016, down from 24% in revenue in 2015. However, Broadcom and Avago merged to form the present Broadcom in 2016. The company notes that direct and indirect sales to Apple accounted for more than 10% of total sales in 2016 and more than 20% of sales in 2015. My interpretation of this means that Apple now represents less than 20% of Broadcom's sales in 2016, since the company went out of its to say Apple was greater than 20% in 2015.

A close reading of these 10-Ks shows that both companies have significant portions of their revenue tied to Apple and both seem to be on the road to diversifying away from Cupertino. Which company is best positioned to benefit if the iPhone 8 crushes expectations? These numbers suggest Skyworks has more to gain, while Broadcom appears to be the more conservative choice. 

Michael Kramer and the clients of Mott Capital Management, LLC own shares of SWKS. Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request the advisor will provide a list of all recommendation made during the past twelve months. Past performance is not indicative of future performance.

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