Best Bets Among Apple Suppliers; IPhone demand is improving but not all parts makers are created equal

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.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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