Why Apple Supply Chain Concerns Are Growing and Spilling Over Elsewhere

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A recent Credit Suisse report suggests that the Apple Inc. (NASDAQ: AAPL) Asia supply chain is weakening. This report came after the firm performed checks on Apple’s supply chain, which it believes has now reduced the iPhone 6s component orders. Credit Suisse now is expecting component orders to decline by only single digits in the calendar fourth quarter, but by about 20% in the calendar first quarter.

The following companies were mentioned in the report as having exposure to Apple in its supple chain, and 24/7 Wall St. noticed that the their stocks were lower after the report was issued as well.

  • Avago Technologies Ltd. (NASDAQ: AVGO) has approximately 20% exposure. Avago shares were last seen down 3.8% at $121.66 on Tuesday. It has a consensus analyst price target of $162.81 and a 52-week high of $150.50.
  • SanDisk Corp. (NASDAQ: SNDK) has about 19% exposure. Shares were last seen down 0.5% to $76.49. Note that the company is being acquired by Western Digital Corp. (NASDAQ: WDC).
  • Analog Devices Inc. (NASDAQ: ADI) exposure is about 15%. Shares were down 1.7% to $59.91, versus a consensus price target of $67.59 and a 52-week high of $68.97.
  • Broadcom Corp. (NASDAQ: BRCM) likewise has about 15% exposure. Broadcom, which is being acquired by Avago, was last seen down 2.2% to $52.01.
  • Texas Instruments Inc. (NASDAQ: TXN) exposure is near 12%. Shares were down 0.8% at $56.77, versus a $58.20 consensus analyst price target and a 52-week high of $59.99.
  • NXP Semiconductors N.V. (NASDAQ: NXPI) has exposure of around 10%. Its shares were down 1.35% to $80.01, against a consensus analyst price target of $103.70 and a 52-week high of $114.00.
  • Fairchild Semiconductor International Inc. (NASDAQ: FCS) exposure is about 10% as well. Shares were down 1.5% at $17.61. The consensus price target is $17.06 and the 52-week high is $20.84.

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Despite the near-term weakness in the first half of Apple’s 2016 fiscal year, the long-term view from Credit Suisse is still very strong. According to the firm’s Kulbinder Garcha:

In our view, the continued weak supply chain news could weigh on Apple shares for the next few weeks/quarters. While we lower calendar year 2016 EPS estimates by 6%, we continue to believe that with high retention rates, continued installed base growth, and the optionality of a smaller 4-inch iPhone.

Now the cuts seem to be driven by weak demand for the new iPhone 6s, as overall builds are now estimated to be below 80 million units for the fiscal first quarter and between 55 million and 60 million units for the March quarter. As a result, the firm lowered its 2016 calendar year units to 222 million from 242 million to reflect this and assumes 235 million for 2017 (6% growth year over year).

The report also said:

While the near-term pressures exists, we note several factors are important when assessing the outlook for the iPhone business. First, based upon our installed base analysis, we believe that iPhone installed base will grow to 615mn over time driven by its recent expansion (24% in the past year). Second, the new installment plans over time will drive higher units long-term. Third, we note that Apple’s recent capex guidance and purchase obligations suggest our iOS units have 25% upside (providing some evidence that it may intend to launch a 4-inch screen device).

The firm maintained an Outperform rating for Apple, with a price target of $140, which implies upside of nearly 20% from the current price.

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Shares of Apple were down 3.1% at $116.80 in early afternoon trading, with a consensus analyst price target of $148.88 and a 52-week trading range of $92.00 to $134.54.