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Want To Get In On Apple? Consider Its Suppliers as Investments

Apple (NASDAQ: AAPL) is still trying to recover from the negative reaction to its third quarter earnings report last week. While the reasons investors were unhappy varied, the main reason related to the recently unveiled iPhone 6. Worried that Apple may have reached its pinnacle in selling the high-end smartphone, investors sent the stock lower.

The leaner than anticipated iPhone 6 sales caused angst among investors, but how are Apple suppliers for the iPhone 6 faring? They include: Skyworks Solutions (NASDAQ: SWKS),  NXP Semiconductors (NASDAQ:NXPI), and ARM Holdings (NASDAQ:ARMH) chip design.

Apple Disappoints

Before getting into the details about how Apple’s suppliers were affected by its stock decline, let’s take a look at how the tech giant fared during its third quarter, ending June 27.

Company officials chalked up the quarter as having record sales of the iPhone and Mac, all-time record revenue from services and the successful launch of Apple Watch.


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According to Apple’s earnings press release, the company posted quarterly revenue of $49.6 billion and quarterly net profit of $10.7 billion, or $1.85 per diluted share. These results compare to revenue of $37.4 billion and net profit of $7.7 billion, or $1.28 per diluted share, in the year-ago quarter. Gross margin was 39.7% compared to 39.4 % in the year-ago quarter. International sales accounted for 64 percent of the quarter’s revenue.

Luca Maestri, Apple’s chief financial officer, had the following to say about the quarter in the earnings press release.

“In the third quarter our year-over-year growth rate accelerated from the first half of fiscal 2015, with revenue up 33% and earnings per share up 45%,” said “We generated very strong operating cash flow of $15 billion, and we returned over $13 billion to shareholders through our capital return program.”

When the market opened for trading last Tuesday, Apple was trading around $131 a share. After it reported the Q3 earnings for the period ending on June 27, the stock dipped as low as $119.20. It closed at $120.33, effectively wiping out about $60 billion of its estimated $753 billion market cap.

Although smartphone sales are typically lower during the spring and summer months as consumers wait until the holidays to make purchases, partly due to holiday deals, the lower sales for Apple’s last quarter was different.

 

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The Wall Street Journal noted that the decline in iPhone sales dip to 47.5 million amounted to a drop of about 23% from Apple’s fiscal second quarter of 2015. Furthermore, that was a steeper rate of decline than the previous two years when quarter-on-quarter sales fell by 19% and 17% respectively, according to The Wall Street Journal.

Apple also briefly fell below its 200-day moving average Tuesday and Apple hasn’t closed below this metric since Sept. 17, 2013, according to news reports. At its lowest point around $120, Apple had lost $62 billion off its market cap, which had soared to $753 billion, making it the most valuable company the world.

What Apple’s Slump Means For Suppliers

Now that we’ve gone over Apple’s numbers for the last quarter, let’s look at the suppliers, specifically those whose parts power the iPhone 6.

There are two main we see you as getting in on Apple as investment.

If you are considering investing in Apple, there are viable options. First, buy now while it is trading lower because the stock tends to rebound nicely. It’s trading now around $125 a share, which is about $10 share of its 52-week high. Just keep in mind that the Q3 results may very well be a sign that the smartphone market is saturated and the good old days of record sales of the devices may be waning.

Another way to ride the coattails of Apple may be through its suppliers. The following is a list of some of the suppliers whose parts are in the iPhone 6.

Skyworks Solutions (NASDAQ: SWKS) had a good third quarter in terms of earnings. It supplied the chip for the iPhone 6’s 5.5 inch screen models. After beating the street’s estimates several analysts increased their price targets on the company. It closed Friday around $99.

Pacific Crest Securities raised the price target to $120 from $110. The analyst for the firm is banking on the increasing content on iPhone 6S and improving Chinese demand as reasons.

Skyworks reported earnings being up 61%, and revenue rose 38% to $810 million. Analysts had expected $1.29 and $801.5 million.

Then there is NXP Semiconductors (NASDAQ: NXPI). Apple uses its near-field communications technology in its mobile pay service. Following Apple’s earnings release last week, NXP’s stock fell 2.38% to $90.20.

The company produces several components for the iPhone, including a part required for the Apple’s new mobile Pay feature. Providing iPhone users a pay system is slowly catching on. Over the long term it’s likely that NXP could significantly benefit from supplying Apple with the parts for this feature.


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Keep an out on the stock this week; it reports its Q2 earnings on July 29.

ARM Holdings licenses (NASDAQ: ARMH) its chip technology to several smartphone manufacturers, including Apple. ARM Holdings receives royalties from Apple and other smartphone manufacturers that pay royalties. While it performed

It reported earnings for its second quarter last week. While it missed analysts’ estimates, it did meet profit projections. Specifically, its revenue in the three months ended in June was up 15%, year over year, totaling about $357 million. Estimates were $359 million.

Its earnings per share were $.34, which met analysts’ estimates.

Do consider ARM Holdings for many reasons. One of them is the royalty revenue it receives when products using its licenses are sold. According to an interview ARM Holdings’ CEO gave to Bloomberg. Its chips are in 95% of the world’s smartphones.

He noted that the company is experiencing “very strong” growth in royalty revenue.





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