Please ensure Javascript is enabled for purposes of website accessibility

How This Apple Supplier Just Benefited From Disappointing iPhone XR Sales

By Ashraf Eassa - Dec 7, 2018 at 3:36PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Apple's older iPhones are seeing some love.

It's no secret that Apple's (AAPL 0.00%) iPhone XR -- the cheapest of its newest set of iPhones -- hasn't been selling as well as hoped. We've seen mid-quarter guidance reductions from important Apple suppliers, as well as reports from reputable news sources to that effect. Unsurprisingly, this has led to a sell-off in Apple stock as the company's business depends heavily on the performance of its iPhone product line.

About a month ago, Nikkei Asian Review reported that Apple had told "its top smartphone assemblers Foxconn and Pegatron to halt plans for additional product lines dedicated to the [iPhone XR] that hit shelves in late October." 

Apple executive Phil Schiller on stage with images of blue and yellow iPhone XRs projected behind him.

Image source: Apple.

Additionally, the report claimed that Apple was having those suppliers crank out more of its older, discounted iPhone 8 and iPhone 8 Plus devices.

"Apple previously planned 20 million units for the older iPhone models this quarter, but raised the figure to 25 million units," wrote Nikkei Asian Review.

As it turns out, this report was, at the very least in terms of general direction, right on the money based on what Apple supplier Broadcom (AVGO -0.66%) had to say during its fourth-quarter earnings conference call.

The Broadcom drama

Broadcom sells wireless chips to Apple for many of its products, with the most lucrative for the chipmaker being the iPhone. Unfortunately for the chip giant's wireless business, Apple shifted some chip content for the iPhone XR away from Broadcom and to an alternate supplier. 

What's interesting, though, is that on Broadcom's fourth-quarter earnings call, CEO Hock Tan said that the company's "wireless revenue ... was somewhat better than our expectations for the fourth quarter as we benefited from upside volumes of legacy phone generations at our North American OEM customer." (That customer is widely understood to be Apple.)

This suggests that Apple has, indeed, increased its orders for the older iPhone 8 and iPhone 8 Plus compared to its original expectations -- just as Nikkei Asian Review reported a month ago. While Apple probably isn't too happy to sell older iPhone 8 devices in place of its newer iPhone XR products, Broadcom clearly stands to benefit from this situation. 

Broadcom strikes back

Tan told investors that "we believe the reset in our wireless business in the first half of 2019 from share loss in the current phone generation will be followed by a substantial recovery in the second half as we take share back for the next generation."

In the fourth quarter of fiscal 2018, Broadcom's wireless business was "down 5% year on year" and "represented 31% of our total revenue," according to Tan. 

Additionally, CFO Tom Krause told participants on the call that during its fiscal 2020, the company expects its wireless business "to see a return to more standard mid-single-digit growth rates."

It's worth noting that since Broadcom's wireless business makes up a significant portion of the company's revenue, and since sales to Apple represent a significant portion of the company's wireless business (nearly 66% in fiscal 2017), winning back that lost share at Apple and getting its wireless business back on a growth trajectory is certainly something that Broadcom shareholders should want to see. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Broadcom Limited Stock Quote
Broadcom Limited
AVGO
$505.71 (-0.66%) $-3.38
Apple Inc. Stock Quote
Apple Inc.
AAPL
$141.66 (0.00%) $0.00

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
336%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.