- Shares of leading Apple Suppliers Skyworks Solutions, Avago Technologies and Qorvo have been hammered over the past one week.
- This is partly due to Apple's slowing iPhone sales and partly due to the guidance provided by another Apple supplier.
- What is the general outlook for these three suppliers?
In what appears to be an ironic twist of fate, shares of leading Apple (NASDAQ:AAPL) suppliers Skyworks Solutions (NASDAQ:SWKS), Avago Technologies (NASDAQ:AVGO) and Qorvo (NASDAQ:QRVO) have all been hammered ever since Apple delivered robust fourth quarter results. Apple reported revenue of $51.5 billion, good for 22% Y/Y growth, and net profit of $11.1 billion, or EPS of $1.96 per diluted share, good for 38% Y/Y growth. Most of Apple’s growth metrics showed marked improvement: Gross Margin was up 199 basis points to 39.9% while iPhone ASP, a chief bone of contention for Apple bears, grew 10% to $670, significantly better than consensus of $649. China sales, another closely watched number, was up an astounding 99% to $12.52 billion. The results capped a strong year for Apple, with annual revenue up 28% to nearly $234 billion, the best topline performance by the company.
iPhone Sales Slowing Down
Apple managed to top analysts’ expectations in every category except one--iPhone unit sales. Apple reported that it had sold 48.04 million iPhones and 9.88 million iPads during the quarter, both of which came in slightly below expectations. And, while the miss was not that bad, it provided growing evidence that Apple cannot continue growing smartphone sales indefinitely in a market that is maturing rapidly. It’s very likely that those iPhone sales received a nice boost from the launch of iPhone 6S and the miss would have been much worse than reported, if not for the late boost.
But the pessimism surrounding the three Apple suppliers mainly stems from recent reports that Dialog Semiconductor, a German outfit that supplies power management chips for Apple’s iPhones and iPads, provided light guidance during its third quarter earnings call. Dialog Semiconductor derives 70% of its revenue from Apple. Dialog’s revenue rose 18% Y/Y during the third quarter to $330 million compared to 44% growth recorded during the second quarter courtesy of strong iPhone 6-related demand. What’s even worse is that Dialog guided for revenue growth of -1% to +6% for the fourth quarter. Dialog Semiconductor shares tanked more than 20% in Frankfurt after the report.
Recent teardowns of the new smartphones by Chipworks and iFixit revealed that iPhone 6S sports a lot of content from the three suppliers. For instance, iPhone 6S sports two Skyworks’ power amplifier modules as well as filters, switches, and Wi-Fi power amplifiers from Qorvo and Avago. Skyworks Solutions seems to be the biggest winner here, with B.Riley analysts saying the company receives about $6.75 for each iPhone 6S sold. Skyworks Solution shares are up just 7% YTD, one of the company’s worst performances during recent times, as its strong association with Apple has been acting as a drag rather than a boost. Skyworks Solutions is due to report its Q3 2015 earnings on November 5th. Given Apple’s strong trajectory, there is good chance that Skyworks will deliver impressive third quarter results. But its outlook could be something else altogether (read takeaway at end).
But Qorvo could easily turn out to be the biggest winner yet. Qorvo shares have sold off 33.8% ever since the company guided light during its last earnings call citing weakness in China. Yet China has proven to be a very strong market not only for Apple, but also for companies like McDonalds (NYSE:MCD) and Nike (NYSE:NKE). Other than being a top Apple supplier, Qorvo does a lot of business with leading Chinese smartphone companies such as Huawei, which has been doing even better than Apple. Qorvo therefore has good potential to spring a pleasant surprise for investors when it reports third quarter earnings on Nov. 5. But just like Skyworks Solutions, Qorvo’s guidance might make or break the shares.
Avago shares are up more than 22% YTD on the potential merger with Broadcom. Avago will report earnings on Dec. 2 and stands a good chance to beat estimates.
Leading Apple suppliers have been badly hammered in sympathy with a smaller Apple supplier that guided light during its latest earnings call. It’s not yet clear why Dialog guided so light for the current quarter though analysts speculate that Apple might be holding on to excessive inventory. If these speculations are accurate, then Skyworks Solutions and Qorvo might get hammered as well when they provide fourth quarter guidance. But both companies are likely to recover and make good gains over the next 12 months due to healthy iPhone 6S demand.