At long last, Apple (AAPL 2.48%) has reportedly secured a deal with China Mobile (CHL) to market the iPhone. This new deal, confirmed by The Wall Street Journal, opens the door to roughly 760 million mobile subscribers in China for Apple.
Although rumors had been heating up in recent months regarding an impending deal between the two companies -- especially when China Mobile selected Alcatel-Lucent to develop its 4G TD-LTE network back in September -- nothing was certain seeing as China had yet to issue 4G mobile licenses. However, now that China's Ministry of Information and Internet Technology, or MIIT, has granted licenses to the three state-owned mobile operators, the major pieces have fallen into place for the iPhone to launch on the biggest mobile network in the world .
What could this new deal mean for Apple?
Even with 760 million additional subscribers to market the iPhone to, expectations for Apple likely should be tempered. Despite China Mobile's unrivaled subscriber base, only 23% are 3G subscribers. Presumably, this would represent the true base of subscribers who would most readily leap at the opportunity to purchase a new iPhone 5s or 5c.
Yet given China Mobile's large base, this opportunity is quite substantial. If just 10% of these 3G subscribers switched to a new iPhone, this would represent an additional 17 million units sold, which would translate to an 11% increase in units sold over the past fiscal year.
Source: Kantar WorldPanel ComTech.
Nonetheless, this certainly could prove to be a very conservative forecast if iOS smartphone sales in other Asia Pacific countries come to pass in China. An extremely positive case for change can be seen in Japan's recent sales numbers as iOS smartphone sales outstripped all others, including Android, for the period that ended this past October. When you consider the fact that China has not had a 4G network to boast of until now, and that the largest mobile operator did not carry Apple's iPhone, you can easily see iOS sales aligning more with Australia's, or even Japan's, figures once the nation's 4G network gets fully implemented on Dec. 18.
As Apple grows, so will the Apple "tree"
Undoubtedly, this new deal will benefit Apple, and investors are likely chomping at the bit, impatient to see this translate into top-line growth. However, if prospective Apple investors have waited this long on the sidelines, it might make more sense for them to seek out alternative plays on this anticipated growth from Apple.
Although Apple's stock plummeted earlier this summer, it has since rebounded and is finishing the year at a torrid pace, up almost 28% these past six months, which translates to a 5% increase year to date. Though most will correctly view a 5% increase as modest at best, perhaps better derivative plays lie in wait, further down the Apple tree.
Investing in derivative Apple-suppliers
Interestingly, additional investment opportunities abound when branching out from Apple, instead consider those key suppliers who stand ready to benefit from this new deal. Some that now warrant further consideration include Broadcom (NASDAQ: BRCM), Qualcomm, and Cirrus Logic (CRUS 2.00%)since all three have high exposure to Apple. Seeing as Qualcomm is up over 18% on the year, it stands to reason you might start with Broadcom, down over 17% on the year, and Cirrus Logic, which has fallen almost 30% year to date.
Seeing as Broadcom derives 45% of its sales from its mobile and wireless division, the stock appears ready to make a run given Apple's new deal. This makes sense since Apple decided to utilize Broadcom's combo connectivity chips -- which encompass WiFi, Bluetooth, FM, and GPS -- along with Broadcom's touchscreen controller IC for the iPhone 5s, making Apple one of Broadcom's biggest customers. Many anticipate Apple to account for 10% to 11% of Broadcom's sales this year.
Yet, if you really believe in Apple's growth story, but missed the boat on the sub-$400 share price this summer, Cirrus Logic might be the answer. Importantly, since 2009, Cirrus Logic's compounded annual growth rates for revenue, operating income, and operating cash flow were 54.2%, 99.2%, and 85.6%, respectively. In that time, it has grown its exposure to its largest customer, Apple, to an estimated 80% of sales this year.
Given Apple's new deal with China Mobile, Cirrus Logic looks like a great candidate to see a run-up in its stock price, especially given the beating it has taken in 2013. And with Cirrus Logic's short interest at 22% given the latest mid-November reading, this derivative play's upside appears to increase since a short squeeze could be in order as the positivity surrounding Apple, and therefore Cirrus Logic, increases at year's end.
Closing thoughts on this new deal
With a population restless to spend, China stands ready to aid Apple in its quest for growth. Considering Apple's track record around the globe and within the region, Apple has every reason to feel optimistic. Considering all options available, it makes sense to begin investigating potential plays on the supplier side, with both Broadcom and Cirrus Logic as strong starting points.
