Best Bets Among Apple Suppliers; IPhone demand is improving but not all parts makers are created equal
April 8, 2014 Leave a comment
MONDAY, MARCH 24, 2014
Best Bets Among Apple Suppliers
IPhone demand is improving but not all parts makers are created equal.
Pacific Crest Securities
Supply-chain conversations indicate improving demand trends for the iPhone, which is positive for Apple component suppliers.
Despite this, we remain cautious longer term for Apple (ticker: AAPL) suppliers Cirrus Logic (CRUS) and OmniVision Technologies (OVTI). We see healthy sell-through at Apple as an incremental positive for Arm Holdings (ARMH) and Broadcom (BRCM).
Consistent with our recent carrier checks, our supply-chain conversations indicate Apple component demand trends have improved, driven by better-than-expected demand for the iPhone 5S and a reduction in iPhone 5C retail channel inventories to targeted levels. Furthermore, Pacific Crest Apple analyst Andy Hargreaves believes replacement rates remain strong and that Apple is gaining share at high-end customers. He sees potential upside to his iPhone unit-sales estimates of 39.7 million units in March and 33.6 million units in June.
Accordingly, we see significantly less risk to near-term estimates for Apple supply-chain partners Cirrus and OmniVision and view these trends as positive for Arm and Broadcom.
Based on supply-chain conversations, Hargreaves expects a larger 4.7-inch screen iPhone 6 to launch in September. While a higher subsidized price of $299 could benefit Apple, we do not expect that component suppliers Cirrus and OmniVision will benefit as their revenue growth will be driven primarily by unit-volume growth. While a larger-screen iPhone 6 could drive incremental share gains at the high-end, we do not anticipate that a new larger-screen iPhone will materially change Pacific Crest estimates for iPhone unit growth in of 3.7% in calendar 2014 (154 million units), down from 13.5% growth in calendar 2013.
Given improving near-term demand for iPhones, indications of inventory replenishment at wireless suppliers following a two-quarter correction, and Taiwan Semiconductor Manufacturing‘s (TSM) positive preannouncement, we remain buyers of Arm [rated at Outperform] and continue to see an attractive trading opportunity in Broadcom [rated at Sector Perform].
We see significantly less risk to our near-term estimates for Cirrus and OmniVision, but our concerns about long-term saturation of high-end smartphones and increasing competition are unchanged. Our ratings on Cirrus remains Underperform and we see fair value to $14. OmniVision remains Sector Perform.
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