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3 Apple Suppliers Poised for Outperformance

By Piyush Arora - Jul 14, 2014 at 7:30PM

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Morgan Stanley expects the upcoming iPhone 6 to be a blockbuster. Which iPhone suppliers should you buy?


Apple's iPhone 6 ( AAPL 2.15% ) is coming, and probably with a bang. Katy Huberty of Morgan Stanley, after her tour in Asia, recently noted that orders for iPhone 6 are 20% higher than they were for iPhone 5s -- up from the previously estimated 12%. 

This, of course, will contribute in boosting Apple's top line. But hardware and software suppliers -- namely, Micron ( MU 1.02% ), Jabil Circuit ( JBL 1.22% ), and Glu Mobile ( GLUU ) -- also stand to benefit immensely. Do these companies deserve a place in your portfolio? Let's find out.

DRAM modules
Apple's A-series chips, just like any other computing processors, require access to a speedy DRAM memory. And the currently available iPhone 5s and 5c variants are equipped with LPDDR3 and LPDDR2 memory modules, respectively. Tear downs of iPhone 4s, 5, 5c and 5s indicate that these chips were manufactured by Elpida Memory -- a subsidiary of Micron. 

Trefis estimates that Apple uses about 80% of Elpida Memory's installed mobile DRAM manufacturing capacity. Plus, it is estimated sales to Apple account for 13% of Micron's overall sales. Since Apple and Elpida have had a long and successful corporate relationship in the past, there is no reason to suggest that Apple will drop Elpida as its prime mobile DRAM supplier anytime in the future. This, in turn, suggests that Micron will continue to benefit from surging iPhone sales.

The chipmaker has already sent its next-gen LPDDR4 modules for rigorous sampling and testing purposes. These modules, as compared to LPDDR3 standards, are about 60% faster and consume 40% less power -- a major technological upgrade. 

Hardware components
Jabil Circuit, on the other hand, is a global provider of electronics manufacturing services and solutions. For Apple, though, the electronic-component maker manufactures iPhone 5c cases and metal exteriors for the iPhone 5s. 

Jabil Circuit is a fairly diversified company, with its manufacturing services representing about 40% of its overall sales. On a client-basis, however, Apple is Jabil Circuit's largest components buyer; sales to Apple represent about 19% of the component maker's overall revenue. 

Investors should note that Apple recently rejected the chassis supplied by Catcher Techology's for its iPhone 6, due to manufacturing defects. According to China-based Economic Daily News, Apple has now reluctantly placed its iPhone 6 chassis orders to Foxconn and Jabil Circuit. 

This not only strengthens Jabil's relationship with Apple, but also positions the former to benefit immensely from the expected surge in iPhone 6 shipments.

iOS apps
Glu Mobile is another prominent Apple supplier. But unlike its mentioned hardware-only peers, Glu develops and distributes engaging apps for mobile devices -- something that decides the adoption and retention rate of a mobile platform.

The app developer currently distributes about 50 games on popular mobile platforms including iOS, Android, and FireOS. Despite its diversified clientele and product-portfolio, however, Glu Mobile generates about 64% of its revenue from Apple's app store. 

Needless to say, Glu Mobile stands to benefit immensely from the growth in iPhone 6 shipments. And to further expand its user-base, the app-maker has tied-up with EON Productions and MGM Interactive to launch its first free-to-play mobile game under its James Bond franchise license. 

Management of Glu also intends to release follow-up iterations of its financially blockbuster franchisees later this year -- including Frontline Commando: D-Day, Blood and Glory, Deer Hunter, and a theatrical title of Hercules. These launches should, in theory, contribute in further boosting the app-developer's growth. 

Foolish final thoughts
All the mentioned companies have a significant operating exposure to Apple's iPhone devices. Needless to say, these companies seem well positioned to benefit from the surging iPhone sales. Investors, however, might want consider diversifying their portfolio to balance their rewards and to reduce their risk.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Glu Mobile Stock Quote
Glu Mobile
GLUU
Micron Technology, Inc. Stock Quote
Micron Technology, Inc.
MU
$82.45 (1.02%) $0.83
Jabil Circuit, Inc. Stock Quote
Jabil Circuit, Inc.
JBL
$59.71 (1.22%) $0.72
Apple Inc. Stock Quote
Apple Inc.
AAPL
$165.32 (2.15%) $3.48

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

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