Huge Apple Earnings Look Very Positive for 5 Top Chip Companies

August 2, 2018 by 247lee

In a quarter in which Apple Inc. (NASDAQ: AAPL) often stumbles, the second quarter in 2018 proved to be huge for the technology giant as its posted numbers well above Wall Street expectations, and the stock printed all-time highs on Wednesday as the company moves closer to a $1 trillion market capitalization. Not only is it big for Apple shareholders, but investors that hold the semiconductor stocks in the Apple supply chain should be pretty enthused as well.

A new Deutsche Bank research report notes that the results are more positive for some companies than others in their coverage, but make no mistake, with average higher selling prices for the iPhone X and the iPhone 8, all systems are go for the company. The report noted this when discussing Apple’s performance:

Apple reported results after the close that we believe should be viewed as a positive for the semiconductor supply chain under our coverage. While iPhone unit sales of 41.3 million were slightly below the Street, inventories appear to be a lower risk this quarter. Apple’s inventory dollars are down to $5.94 billion, while iPhone channel inventory exited the June quarter towards the lower end of the target 5-7 weeks. As a result, we believe risk of further inventory depletion within the Apple supply chain has significantly diminished.

Five stocks that do significant business with Apple are covered at Deutsche Bank, and they should see some positives from the good results and forward outlook.

Texas Instruments

This old-school tech company offers solid value. Texas Instruments Inc. (NASDAQ: TXN) is a broad-based supplier of semiconductor components, ranging from digital signal processors to high-performance analog components to digital light-processing technology and calculators. Some 65% of Texas Instruments sales are exposed to the well-diversified, business-to-business industrial, automotive, communications infrastructure and enterprise markets.

The analysts noted this when discussing the company’s exposure to Apple:

Texas Instruments exposure to Apple has historically been described as across hundreds of parts and evenly spread out between their devices. Apples revenus mix is ~60% iPhone, ~10% each for Mac, iPad, Services, ~5% others, thus we think that the company’s exposure to Apple iPhones in particular could be ~5% of total sales.

Shareholders receive a 2.23% dividend. Deutsche Bank rates the shares at Hold with a $115 price target. The Wall Street consensus target price is $124.70, and the shares closed trading Wednesday at $111.

Intel

This semiconductor leader is working hard to focus more on Internet of Things and data center cloud spending and away from PCs. Intel Corp. (NASDAQ: INTC) designs, manufactures and sells integrated digital technology platforms worldwide.

The company’s platforms are used in various computing applications, comprising notebooks, two-in-one systems, desktops, servers, tablets, smartphones, wireless and wired connectivity products, wearables, retail devices and manufacturing devices, as well as for retail, transportation, industrial, buildings, home use and other market segments.

Intel’s share of Apple business is growing and looks like a big positive, according to the analysts, who said this:

We estimate that iPhones could be ~5-6% of sales next 12 months for Intel with 100% of baseband allocation as announced by Qualcomm. Combined with CPU sales in Macbooks (~18 million units next 12 months at above corp-average CPU average selling prices), we suspect Apple could reach 7-9% of Intel’s sales next 12 months in aggregate, with phones ~2/3rds of that figure and PCs ~1/3rd. We note that Intel’s exposure to Apple would almost exclusively be within the Client Computing Group, which is ~50% of sales and is forecasted to grow +7% year over year by our estimates in calendar year 2018 estimated.

Intel investors receive a 2.46% dividend. The $64 Deutsche Bank price target for the Buy-rated stock is well above the $56.32 consensus price objective. The shares closed trading Wednesday at $48.81, down over 15% over the past six weeks.

Analog Devices

This stock could very well benefit from an increase in information technology spending. Analog Devices Inc. (NASDAQ: ADI) is a leader in the design, manufacture and marketing of analog, mixed-signal and digital signal processing integrated circuits for use in industrial, automotive, consumer and communication markets worldwide. It offers signal processing products that convert, condition and process real-world phenomena, such as temperature, pressure, sound, light, speed and motion, into electrical signals.

Last year the company introduced a highly integrated polyphase analog front end with power quality analysis designed to help extend the health and life of industrial equipment while saving developers significant time and cost over custom solutions. Achieving extremely accurate, high-performance power quality monitoring typically requires customized development, which can be expensive and time-consuming.

This company does a sizable portion of business with Apple, and the analysts noted this:

Apple was a 14% customer in 2017 and a 13% customer in 2016, though we expect this to decline to the 5-7% range over the next 12, months and likely stabilize ~5% in 2019. Analog Devices mainly supplies the 3D touch modules in iPhones, though with the recent design out, the company will still have exposure to Apple through other Analog parts. We forecast the company’s Consumer segment declining -22% year over year to $823 million in fiscal 2018 estimated, representing 13% of sales.

Investors receive a 2.00% dividend. Deutsche Bank has a $93 price target with a Hold rating. The consensus target is posted higher at $108.26, and the stock closed Wednesday at $96.04.

ON Semiconductor

Aggressive accounts may want to look at this smaller cap play. ON Semiconductor Corp. (NASDAQ: ON) is a vendor of analog power management, analog signal conditioning, standard logic integrated circuits and discrete chips into the automotive, communications, computing, consumer, industrial and medical applications. It is in the midst of a transformation from a seller of commodity discrete chips into higher value-added analog integrated circuits both through organic growth and acquisitions.

The analysts view ON as an underappreciated way for investors to benefit from the emergence of advanced driver-assistance systems and eventually autonomous driving. While the company is inherently levered (operationally and financially) and therefore subject to investor fears of cyclical volatility, many continue to see structural upside for the shares.

This company could be gaining Apple business, and the analysts explained why:

ON has not historically had a meaningful exposure to Apple; however, we believe that their content is likely rising at Apple in next-gen devices. Specifically, we see them gaining content in Apple’s fast charging solution (charger side vs. device side). We estimate that this could mean that Apple is ~3-5% of ON sales in 2018 estimated.

Deutsche Bank has a Buy rating with a $27 price target. The consensus target is $27.42. Shares closed Wednesday at $22.26.

Qualcomm

This company still has some ongoing legal issues with Apple. Qualcomm Inc. (NASDAQ: QCOM) designs, develops and supplies semiconductors and collects royalties on wireless handheld devices and infrastructure based on its dominant position in CDMA and other related technology patents.

In addition, Qualcomm provides systems software and components to wireless handset vendors and promotes applications and services that run on high-speed wireless networks. The company operates primarily through two segments: CDMA Technologies and Technology Licensing.

While the court battles between the two companies go on, the company still will do business with Apple, and the analysts explain how:

Qualcomm has acknowledged share loss in the next gen iPhones as Apple will utilize a competitors’ modems, though Qualcomm will continue to supply prior iPhone/ iPad generations. As litigation between Apple and Qualcomm remains ongoing, Qualcomm is not currently receiving royalty payments from Apple. We model some resolution to Qualcomm’s formal/inform disputes with its licensees beginning in the the second quarter of 2019, albeit at a lower than historical implied royalty rate.

Shareholders receive a 3.84% dividend. The stock is rated Hold with a $67 price target at Deutsche Bank, while the consensus target is $66.29. Shares closed Wednesday at $64.35.

I'm interested in the Newsletter
 

Apple is right on the brink of becoming the first $1 trillion market cap company, and supply chain vendors that stay in the good graces of the tech behemoth could be in good shape for years to come. All these chip companies are good stock choices for aggressive accounts to consider.