Forget Apple! Buy These Stocks Instead

With the introduction of the iPhone 4 in late June, Apple (Nasdaq: AAPL  ) once again cemented itself as the cutting-edge technology stock to own. The company's growth has been absolutely phenomenal over the last three years, more than doubling revenue and easily surpassing price projections.

So why would anyone not go out today and buy shares of Apple? Because the sum of the parts is actually greater than the whole.

Scratching your head?
Despite Apple's numerous successes, you have a greater profit potential from buying the individual component suppliers for the iPhone 4 than Apple itself. Apple's success has ballooned the company to more than six times book value and 4.5 times sales figures. Simply put, it's not the value it once was.

Instead, out of the 12 known component suppliers to the iPhone 4, I've isolated three that could give you a good chance to outperform Apple. Not surprisingly, all three suppliers are growing revenues at double-digit paces, have plenty of cash on hand, and trade at significantly lower book and sales multiples than Apple.

Even better, each company here is significantly smaller than Apple on a market cap basis. The earnings boost they receive from being an iPhone 4 component supplier could have a greater positive impact on their stock price.

Company

Current Year Revenue Growth Projections

Price to Book

Price to Sales

Cash Per Share

Cirrus Logic (Nasdaq: CRUS  ) 69% 4.64 4.36 $2.10
Broadcom (Nasdaq: BRCM  ) 46% 3.93 3.09 $4.07
Triquint Semiconductor (Nasdaq: TQNT  ) 29% 2.33 1.97 $1.13

Source: Capital IQ, a division of Standard & Poor's, and Yahoo! Finance.

In Cirrus we trust
No company has benefited more from the iPhone craze than Cirrus Logic, which has seen a meteoric 600% rise in its stock price since January 2009. Cirrus provides the audio codec -- the microchip which allows the phone to conserve energy by rerouting audio functions through its chip instead of the main processor.

Apple has accounted for 34% to 39% of Cirrus Logic's quarterly revenue over the last year. Thanks to Apple, Cirrus has managed to turn quarterly losses into healthy profits, and has actually grown its gross margins from 52% to 57% in the last year. If you back out the company's $2.10 of cash on hand, you get a company trading at less than 11 times forward earnings and expected to grow this year by 69%.

Apple has no chance to match the intensity of the fire currently lit under Cirrus Logic shares. Despite the huge rise we've already seen, Cirrus should have plenty of room to move higher.

A GPS to profitability
Broadcom may already be a large-cap company at $18 billion, but that doesn't mean it can't benefit from what I'm dubbing the "Apple Effect." Broadcom currently supplies Apple's iPhone 4 with both its GPS chip and its wireless Internet access/Bluetooth chip.

Even though Apple accounts for a fraction of Broadcom's total revenue when compared to Cirrus, the extra boost that Broadcom receives from those orders has been enough to easily propel the company past the profit projections of the 27 analysts who currently cover the stock.

Backing out the company's current $4 in cash per share, Broadcom trades at just 13 times forward earnings, while expecting at revenue growth of 46% this year. Tack on a 1% dividend, and you have a very stable, well-diversified growth story that could outperform Apple.

Amplify your growth
Triquint Semiconductor has been supplying Apple with power-amplifier microchips since a surprising win back during the introduction of the iPhone 3G in 2008. Like Cirrus Logic, Triquint owes a good portion of its revenue -- more than 20% -- to Apple manufacturer Foxconn. This has been the basis for its recent rapid growth.

Triquint practically ignored the economic downturn, and it's grown revenue by double digits every year since 2007. Even more impressively, Triquint has seen its gross margins improve from 32% to 41% in just one year, thanks to the impressive growth in iPhone 4 sales.

Triquint maintains a healthy $1.13 in cash per share; once that's backed out, it trades for just less than 11 times forward earnings, with an expected growth rate of 29% this year. Triquint relies heavily on Apple, but so far this has been a symbiotic relationship, which looks like it could greatly benefit Triquint.

Foolish takeaway: Be optimistic, but stay realistic
These component suppliers look like great values on paper, and they should outperform Apple going forward. But in the end, we have to remember that Apple is the great puppeteer controlling the strings.

At any time in the future, Apple could decide to redesign the next-generation iPhone, leaving one or more of the above companies out of the loop. In fact, a recent publication alluded to just this possibility. While these are simply rumors at the moment, it pays to stay vigilant, and keep up on what Apple has to say about the future of its iPhone.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community

Fool contributor Sean Williams does not own shares in any companies mentioned in this article. You can follow him on CAPS under the screen name UltraLong. Apple is a Motley Fool Stock Advisor recommendation. The Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (8) | Recommend This Article (49)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 07, 2010, at 6:17 PM, SreeRama wrote:

    It's absolutely critical for any business to maintain a healthy stash of cash to ride through the currents of fast changing market conditions and technologies.

    Justifying and making value proposition, by excluding cash on hand can be a bit misleading. Each of the companies you highlight here are good by the prospects they have and do not need to be weighed by excluding the cash position

  • Report this Comment On October 07, 2010, at 11:22 PM, TMFUltraLong wrote:

    SreeRama,

    I agree, these companies above can hold their own, but when over 10% of their value is made up based on cash on hand I think it's an important component to mention.

    UltraLong

  • Report this Comment On October 08, 2010, at 1:14 AM, JAVEROA wrote:

    Any idea why CRUS has been lagging recently? It is down about 35% since it hit its highs!

    There are rumours that CRUS may have been replaced by another provider, though noone knows and there hasn't been a competitor with a huge recent gain to account for this!

  • Report this Comment On October 08, 2010, at 1:35 AM, TMFUltraLong wrote:

    JAVEROA,

    I think Cirrus got a little heated up last quarter. Trust me, I think it has the right mojo to head higher, but a healthy pullback was needed.

    In addition as the above article alluded to, rumors of Cirrus's chip getting replaced are swirling out there. I don't see any merit to them yet, but it's enough to scare investors.

    UltraLong

  • Report this Comment On October 15, 2010, at 2:56 AM, mosesb44 wrote:

    Two of the stock which you recommended is losing money every day. Why recommend them?

  • Report this Comment On October 15, 2010, at 3:05 AM, TMFUltraLong wrote:

    mosesb44,

    I'm assuming you're talking about Cirrus Logic and Triquint. Triquint preannounced and blew the doors off their earnings estimates. I fully expect Cirrus will do the same. Any downward action should be temporary. They'll follow Apple higher.

    UltraLong

  • Report this Comment On October 15, 2010, at 1:48 PM, SkyFlyr wrote:

    Did you give any consideration to Skyworks as benefitting from the smart phone/I-phone explosion?

  • Report this Comment On October 16, 2010, at 1:10 AM, TMFUltraLong wrote:

    Skyflyr,

    I knew someone would comment on Skyworks and yes I did, I just didn't find the ratios and growth rates as intriguing with them as I did with Cirrus, Triquint and Broadcom.

    UltraLong

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