A Big Positive For Apple Stock As Suppliers Post Solid Quartely Results

  • Leading Apple suppliers Skyworks Solutions and Qorvo have delivered healthy quarterly results that sent their shares rallying strongly.
  • Shares of both companies had been selling off prior to their earnings call after another German-based Apple supplier issued weak Q4 2015 guidance which could be an indication of supply chain management issues by Apple.
  • The latest set of results by the two companies prove, among other things, that the Chinese market is nowhere near as weak as earlier feared.

Leading Apple (NASDAQ:AAPL) Suppliers Skyworks Solutions (NASDAQ:SWKS) and Qorvo (NASDAQ:QRVO) are up strongly after both reporting impressive Q3 results that topped expectations. Skyworks’ shares are up 7% over the past five days while Qorvo shares are up an impressive 19.5% over a similar timespan (5 days ending November 9).

Skyworks reported third quarter revenue of $880.4 million, good for 22.6% Y/Y growth and topping estimates of $877.74 million. Meanwhile EPS of $1.52 was in line with consensus estimates. Skyworks guided for fourth quarter revenue of $925 million-$930 million and EPS of $1.60, both of which came in above consensus estimates of $921.5 million and $1.57 for revenue and EPS, respectively.

Meanwhile, Qorvo (formed in January this year from a merger between Triquint and RF Micro Devices), reported second quarter revenue of $708.3 million and EPS of $1.22, beating consensus estimates by $8.87 million and $0.11 for revenue and EPS, respectively. Qorvo went ahead and issued mixed third quarter guidance of $725 million-$730 million or revenue and EPS of $1.25-$1.30. The revenue guidance came in below estimates of $741.6 million, which probably means that the company deliberately sandbagged its guidance so as to give itself a healthy chance to beat its guidance (anybody remember Priceline)? Qorvo guided for EPS of $1.25-$1.30, the midpoint of which came in above consensus of $1.26.

Qorvo shares had been badly hammered after the company issued weak guidance during its second quarter earnings call citing weak demand in the key Chinese market. In an earlier post titled  "Why are Apple Supplier Stock Prices Getting Hammered?", I had pointed out that Qorvo shares had the strongest upside potential because recent results by many American companies including Apple, Nike (NYSE:NKE), and McDonalds (NYSE:MCD) demonstrated that the Chinese market remains much stronger than earlier feared. Qorvo’s selloff was overdone by quite a large margin, and the shares could still have quite a lot of upside potential left even after the latest rally.

Skyworks’s shares are up 16.8% YTD while Qorvo shares have returned -18.45% YTD after the second quarter hammering.

Skyworks Solutions 5-Day Share Returns

Apple Suppliers-1

Source: CNN Money

Qorvo 5-Day Share Returns

Apple Suppliers-2

Source: CNN Money

Skyworks Solutions sports the highest exposure to the fast-growing but volatile Chinese market with more than 80% of its revenue coming from the Middle Kingdom. About half of Qorvo’s revenue comes from China.

China-1

Source: Yahoo Finance

Shares of both companies had been selling off quite heavily after Dialogue Semiconductor, a German company that derives 70% of its revenue from Apple by supplying the Cupertino giant with iPhone and iPad power management chips, recently issued weak fourth quarter guidance, leading investors to speculate that Apple was hoarding too much inventory, an indication of poor supply chain management issues.

Luckily these fears have largely been allayed by the good performance from these two Apple suppliers. This is good for Apple stock since the stock shows some positive correlation with that of its suppliers, though the downstream effect (Apple stock affecting suppliers’ stocks) is usually much stronger than the upstream effect (suppliers’ stocks affecting Apple stock).

The latest set of results by Skyworks and Qorvo continue to provide evidence that the Chinese market is nowhere near as weak as earlier feared. Apple itself recently reported revenue of $51.5 billion for its fourth quarter, of which $12.52 billion (24.3% of Apple’s revenue) came from China after growing an astounding 99% Y/Y. The iPhone has become a premium brand in China much like Gucci, Prada and Rolex in the U.S., with the growing middle class embracing it as a status symbol. With China’s middle class being its fastest growing demographic, it appears as if demand for iPhones in China is not going to slow down any time soon.

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