This article is part of our Rising Star Portfolios series .
Most investors know Cirrus Logic
A whole host of companies are on investors' radars because of their position at the center of the iPhone and other Apple products. Below is a snapshot of their performance today:
Function in Apple Products
|Cirrus Logic||Audio chips||3.4%||31.0%|
|Texas Instruments||Touchscreen controller||(0.7%)||(0.3%)|
||Baseband (Verizon products)||0.9%||8.8%|
|Philadelphia Semi Index||N/A||(0.9%)||1.4%|
Source: iSuppli, Yahoo! Finance.
As shown by the swooning Philadelphia Semiconductor Index, it's actually a fairly dismal day for the semiconductor industry. However, all of the companies listed above that have a presence in the iPhone (and many in other Apple products as well) are outperforming the broader semiconductor index. More to the point, smaller players that have larger iPhone exposure -- Cirrus Logic, Dialog, and Omnivision -- are showing stronger performance not just today, but also across the past month.
The top overall performer in the past month is Cirrus Logic. That's partially because Cirrus Logic had such a precipitous fall during the spring. In a four-month stretch between mid-February and June, Cirrus Logic lost half its value. That fall was part broader market sell-off of companies involved in the mobile industry, and part overreaction to news that Cirrus Logic had to take a $4 million hit for a batch of defective chips.
With investors now warming back up to mobile plays and Apple revealing that iPhone demand continues to accelerate in spite of it not releasing an updated iPhone this summer, are Cirrus Logic and other Apple component suppliers set to crush earnings as well?
Simple logic would dictate yes, but there are caveats:
1. How much of the company's business is with Apple?
Different Apple suppliers have varying correlation to the company's success. For example, Texas Instruments supplies the touchscreen controller that market researcher iSuppli estimates fetches $1.23 per unit. A quarter's worth of iPhone sales might contribute $25 million in sales to Texas Instruments' top line. That's not exactly a game changer for a company that generated $3.4 billion in sales last quarter. On the other end of the spectrum, Cirrus Logic and TriQuint collect 54% and 25% of their revenue from Apple, respectively.
2. Don't forget order lead times
Companies like Apple put in orders to their suppliers well before products hit the market and the lead time varies depending on the product. The end result is that sales results may not directly track Apple's performance in a specific quarter. Also, Apple hinted last night that the next iPhone refresh might not be coming as soon as investors expect.
The consensus idea has been that Apple would release a smaller iPhone update in September of this year, with a full-blown iPhone 5 being unveiled in early 2012. However, Apple CFO Peter Oppenheimer said light guidance for next quarter was partially due to "a future product transition ... [that]... will impact our September quarter." Reading between the lines on Apple's tightly held product cycles is always a fool's errand, but if the company is delaying another iPhone launch and anticipating a weaker quarter, that could mean less demand than expected in the current quarter for Apple suppliers.
3. Could the rest of the company's business be lumpy?
Several iPhone plays have other businesses that are also lumpy. In Cirrus Logic's case, its high-margin sales to the seismic industry can vary wildly from quarter to quarter. TriQuint has a large segment that sells to telecom networks, which can see large quarterly swings in revenue.
Perhaps most importantly, you also need to assess whether Apple's success is hurting other customers. Case in point: Texas Instruments. The Texan semi giant has long been a key partner of Nokia, supplying baseband chips and processors to the company. However, Apple's rise has corresponded to demand for Nokia phones falling off. The small gains Texas Instruments sees from the iPhone are more than negated by the weakness it causes at larger customer Nokia.
These are just a few areas to be on the lookout for as iPhone suppliers release their own earnings. Notably, Cirrus Logic reports tomorrow morning. Also, keep in mind that over the longer term, things like order lead times aren't significant, as they'll smooth out over time. As an investor, you're on the hunt for the best long-term value these companies will create. That means evaluating their price today versus how entrenched they are in Apple's product line.
If you're looking for more updates in the field of iPhone suppliers, make sure to check in with my Rising Star Portfolio, where I've recommended past purchases of Cirrus Logic, TriQuint, and Qualcomm. Or you can follow me on Twitter, where I routinely post my thoughts on Apple and the suppliers who are riding its success to riches.
One last way to stay updated is by following any (or all) of the above companies on our free My Watchlist service. It gives you not only up-to-date news on each company, but also healthy doses of analysis on the investing implications behind the news. To sign up, just click on any company below: