What Do Mixed Signals From Apple Suppliers Tell Us?

  • All major suppliers of Apple components have reported earnings for the December quarter.
  • Most of these suppliers except one have issued downbeat guidance.
  • What should investors make of these mixed signals?

For a long time, Apple investors have frequently relied on the signals sent out by Apple component suppliers to try and figure out a thing or two regarding iPhone sales trends. Some of the most closely watched Apple suppliers include Skyworks Solutions (NASDAQ:SWKS), BROADCOM LTD (NASDAQ:AVGO), which was recently formed by the giant merger between Avago and Broadcom, Qorvo (NASDAQ:QRVO), and Cirrus Logic (NASDAQ:CRUS). Although Apple has in the past warned investors against reading too much into analysts’ findings from channel checks into its components suppliers, a confluence point where the majority of Apple suppliers issue weak guidance is usually taken as a red flag about expected future iPhone sales, and is frequently known to be quite accurate.

This is, however, turning out to be one of those quarters when signals coming from Apple suppliers are mixed making it hard to draw definite conclusions about the health of Apple’s iPhone business. All the suppliers named above have reported December quarter earnings, and all have issued weak guidance for the current quarter. Broadcom was the last to report fourth quarter earnings, and its full-year guidance provided the best insights regarding expected iPhone trends in 2016. Broadcom not only maintained its full-year RF (radio frequency) guidance but raised it, saying it expected a 20% increase in RF content during the second half of 2016.

Broadcom is the largest supplier of these four, hence its guidance tends to carry more weight. During Q1 FY 16, Broadcom recorded a 15% sequential decline in its wireless segment in spite of a significant ramp up in Samsung Galaxy S7 primarily due to wavering iPhone sales. Broadcom said that it expects Q2 FY16 (calendar first quarter of 2016) to be the trough for its wireless business. Broadcom added that it was pre-building Avago classic RF FBAR [Film Bulk Acoustic Resonator] in significant quantities to support a product cycle ramp with its North American customers (read: Apple’s iPhone 7). The investment world was relieved by Broadcom’s upbeat guidance and the other three supplier stocks all rallied significantly.

Broadcom’s full year guidance seems to mirror Wall Street sentiments which indicate that iPhone sales will be getting worse during the current quarter before getting better for the rest of the year.


Source: Business Insider

In the case of Broadcom, the improvements during the second half of the year will more than offset the current weakness being experienced since the launch of the iPhone 6s. Meanwhile, Wall Street remains quite pessimistic about iPhone 7 and do not expect it to enjoy the same type of warm reception that iPhone 6 did. But Broadcom’s guidance seems to suggest that iPhone 7 might sell better than expected although part of the company’s bullishness can be pinned on an increase in RF content in the new smartphone.

Investors frequently forget that Apple does not have to entirely rely on upgrades to drive new iPhone sales since its installed base is still expanding mainly by poaching Android users. Indeed, part of Wall Street thinks that growth in iPhone’s installed base will be enough to drive substantial iPhone sales growth. Mizuho Securities has raised its Apple price target from $120 to $130 (18.5% upside) saying:

"We think iPhone shipment numbers will continue to vary on a quarterly basis and iPhone 7 cycle will likely not be as big as iPhone 6, while it still remains to be seen if it can grow over iPhone 6s.

"However, if we look at LTV of iPhone customers and assume modest growth in the installed base, we think the stock should be worth in the $120-130 range even if iPhone 7 units end up being lackluster initially. We expect supply chain data points to inflect on the positive side starting late spring/early summer."

Mind you Mizuho has already priced in a large 18% Y/Y decline in expected iPhone unit sales in 2016 to 206M saying it does not expect iPhone 7 to become a huge hit. This implies that Apple stock could still have considerable upside even if iPhone sales in 2016 come in much weaker than they were in 2015. Of course, the upside to Apple stock could be much higher if the decline is much smaller than current expectations.

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