Apple (AAPL) is the leading customer for many semiconductor companies. Its high-end iPhones set the tone for the performance of its suppliers. The suppliers enjoy the tag of selling the most advanced and high-quality components. The order volume iPhone brings for its component suppliers gives Apple an upper hand in negotiating the price. In the 12 years of iPhone history, this year could become its most successful one as AAPL upgrades to the next-generation 5G technology.
The iPhone 12 Supercycle
Wall Street is bubbling with expectations. This is expected to be the biggest sales cycle for Apple since 2014 when it launched its five-inch screen option for the first time. For the first time, Apple is launching a 6.7-inch iPhone 12.
But the game-changer is the 5G upgrade. According to Counterpoint Research, Apple commands 46% of the U.S. smartphone market. iPhone 12 will complete the 5G circle, making the technology available on both smartphone platforms – Android and iOS. Moreover, 5G technology is currently reserved for the premium phone market, where Apple is a leader.
Apple has a large existing customer base that has not upgraded beyond the iPhone 8. The 5G angle could kick in a once-in-a-decade upgrade cycle. Wedbush analyst Daniel Ives expects that 350 million iPhones worldwide fall under the potential upgrade basket. The telecom carriers like AT&T (T) and Verizon (VZ) are further boosting the upgrade cycle with their attractive offers and subsidies on iPhone 12.
Apple also stands to benefit from US sanctions on Huawei, China’s largest smartphone maker. These sanctions would increase Apple’s smartphone market share in Europe. It is also tapping new markets by launching its first online store in India, the second-largest smartphone market after China.
Expected iPhone 12 Sales
All these factors would add up to higher unit sales, which has been declining for the last five years, as noted by ZDNet. Many analysts expect Apple to produce more iPhone 12 units from its usual production range of 65 million to 70 million units.
Now, what remains to be seen is how COVID-19 impacts the iPhone upgrade. As most people are at home, they have access to WiFi. Moreover, the currently available 5G network has yet unleashed the true power of the technology. Both of these factors could deter iPhone 12 sales.
If the iPhone 12 supercycle succeeds, Apple’s fiscal 2021 revenue could hit the bullish revenue estimate of $331.5 billion (up 21% year-over-year). But if the iPhone 12 model fails to create a supercycle, its fiscal 2021 revenue could be almost unchanged. Analysts on average expect fiscal 2021 revenue to increase 13% to $309.8 billion.
More than Apple, its suppliers would benefit from the iPhone supercycle because of the increased semiconductor content per iPhone device. Three Apple suppliers — Taiwan Semiconductor Manufacturing Company Ltd. (TSM), Broadcom Inc. (AVGO), and NXP Semiconductors N.V. (NXPI) — would be the biggest winners. Here’s how:
Taiwan Semiconductor Manufacturing Company Ltd. (TSM)
TSM is the sole manufacturer of Apple’s A14 series processors that is powering the iPhone 12 and the latest iPad. TSM is building these processors on its latest 5-nanometer process node. The latest node commands a higher price. The foundry’s smartphone revenue increased 12% sequentially to $5.56 billion in the third quarter driven by initial orders from Apple. Its overall third-quarter revenue surged 29% year-over-year to $12.14 billion, beating the Street estimate by 2%.
The street expects TSM’s revenue to surge 28.7% this year, its highest growth in the last 10 years, and 11% in the next year. This growth expectation reflects Apple’s 5G iPhone as well as Advanced Micro Devices’ (AMD) high-performance products. Investors have priced in this revenue growth. Hence, TSM stock is trading at 10.7 times its sales per share.
But this is just the beginning. As 5G adoption increases, the demand for smartphones, high-performance, automotive, and internet-of-things chips will rise. The street expects TSM’s revenue to surge at a five-year CAGR of 19.7%.
Hence, TSM is rated a “Strong Buy” in our POWR Ratings system. It holds an “A” in Trade Grade, Peer Grade, Buy & Hold Grade, and Industry Rank. It is also the #1 ranked stock in the 86-stock Semiconductor & Wireless Chip industry.
Broadcom Inc. (AVGO)
AVGO is the largest component supplier for iPhones, supplying more than five chips, including Bluetooth and Wi-Fi and, radio-frequency front end module. In 2019, it earned 20% of its revenue from Apple. The iPhone supercycle would increase the unit sales, and every unit of iPhone 12 has higher semiconductor content than the previous model.
To sweeten things further, AVGO has signed two more supply agreements with Apple to supply high-performance communication chips for the latter’s future products in the next 3.5 years. The street expects AVGO’s revenue to surge 5.5% this year and 8.7% next year, organically.
In addition to Apple, AVGO would win from growing spending on 5G infrastructure solutions. Over the next five years, the street expects its revenue to surge at a CAGR of 7.9%.
It’s no surprise that AVGO is rated “Strong Buy” in our POWR Ratings system. It also has an “A” for Trade Grade, Peer Grade, Buy & Hold Grade, and Industry Rank. It is the #2 ranked stock in the Semiconductor & Wireless Chip industry.
NXP Semiconductors N.V. (NXPI)
Just last year, NXPI increased its exposure to Apple by adding an ultra-wideband chip (UWC) to its list of components it supplies for the iPhone. It’s existing supply list includes near-field communication (NFC), a Touch ID sensor, a controller, and a charging component. The charging component is what sets NXPI apart this year.
Apple decided to exclude the charger from the iPhone 12 box to reduce costs. This means users will have to buy the charger separately. At the iPhone launch event, Apple unveiled the MagSafe charger and other accessories that use NXPI’s NFC chips to connect to the iPhone.
NXPI updated its third-quarter guidance from $2 billion to $2.27 billion on the back of strong demand in automotive and mobile end-markets. This revised guidance reflects a 25% sequential increase in revenue. Other than Apple, NXPI would see a significant surge in automotive as demand for electric and autonomous vehicles increase. The street expects NXPI’s revenue to surge at a CAGR of 9.4% in the next five years, with a 12.8% increase coming next year.
Hence, NXPI is rated a “Strong Buy” in the POWR Ratings. It holds an “A” in Trade Grade, Buy & Hold Grade, and Industry Rank and a “B” in Peer Grade. It is the #20 ranked stock in the Semiconductor & Wireless Chip industry.
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TSM shares were trading at $87.37 per share on Monday afternoon, up $0.67 (+0.77%). Year-to-date, TSM has gained 53.02%, versus a 7.68% rise in the benchmark S&P 500 index during the same period.
About the Author: Puja Tayal
Puja is a seasoned writer working with financial publishing companies like Motley Fool Canada and Market Realist. With over 13 years of experience in the field of fundamental research, she brings a blend of comprehensive, well-researched insights into her articles. More...
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