As the holiday season is setting in, more people will be looking to buy consumer electronics. Starting from Black Friday in November, the demand for mobile phones, gaming consoles, laptops, and accessories is likely to surge. One of the most sought-after products in this period is going to be Apple’s iPhone 12. Launched on October 13th, the product has caught everyone’s fancy. Powered by the 5G technology, the iPhone 12 has the potential to strengthen AAPL’s position in the premier phone segment, which it already leads.
According to a Bloomberg report, Apple (AAPL) is prepping up for the mass production of more than 75 million 5G-enabled iPhones. This indicates that there is a huge demand for iPhones despite the COVID-19 crisis. Meanwhile, AAPL analyst Ming-Chi Kuo stated that the standard-sized iPhone 12 and iPhone 12 Pro will be immensely popular with each capturing 30%-35% of the market.
Overall, there is a huge buzz around the iPhone 12 on Wall Street. Analysts believe that it could usher the biggest sales cycle for the company since its launch in 2014. As many of AAPL’s customers haven’t upgraded their products since the iPhone 8 era, the 5G factor could lead to a mass upgrade opportunity.
For the third quarter that ended June 2020, iPhone accounted for 44.3% of AAPL’s total sales. The iPhone sales also increased 1.7% year-over-year to $26.42 billion.
AAPL is one of the major customers for most of the chip companies. The quantum of production and demand for premium quality components spells benefits for chip suppliers. Notably, with each iPhone upgrade, the quantity of semiconductor increases.
Thus, a few of the leading iPhone suppliers like Taiwan Semiconductor Manufacturing Company Ltd. (TSM), Broadcom Inc. (AVGO), QUALCOMM Incorporated (QCOM), and NXP Semiconductors N.V. (NXPI)stands to reap tremendous benefits from the iPhone. With AAPL scheduled to announce its fourth-quarter results October 29th, these stocks could see a decent rally.
Taiwan Semiconductor Manufacturing Company Ltd. (TSM)
The world’s third-largest semiconductor manufacturer, TSM, is a supplier of components for the iPhone 12. It is the only foundry that manufacturers most of the A-series chips in iPhones and iPads. In fact, TSM is the only manufacturer of AAPL’s A14 series processors used in the iPhone 12 and the latest iPad.
TSM’s revenue of $12.1 billion in the third quarter that ended September 2020 surpassed market estimate by 1.8%. The company’s smartphone revenue rose 12% sequentially to $5.6 billion on the back of strong demand driven by 5G smartphones, HPC (high-performance computing), and IoT (Internet of Things) applications. TSM expects its revenue for the fourth quarter ending in December 2020 to see sequential growth amid strong demand for 5-nanometer technology and 5G smartphone launches.
The street expects 12.7% growth in TSM’s revenue to $11.7 billion. Meanwhile, EPS is estimated to grow at 7.9% next year.
On a year-to-date basis, TSM surged 49.2% to close at $86.70 yesterday. In the past six months, the stock rallied 62%.
How does TSM stack up for the POWR Ratings?
A for Trade Grade
A for Buy & Hold Grade
A for Peer Grade
A for Industry Rank
A for Overall POWR Rating
You can’t ask for better. The stock is also ranked #1 out of 86 stocks in the Semiconductor & Wireless Chip industry.
Broadcom Inc. (AVGO)
AVGO supplies semiconductor components to a wide array of industries including networking hardware, data center, broadband, wireless, storage solutions, and industrial markets. It is a sustainable 5G network solution provider. The company is one of the largest chip providers for iPhones. In 2019, it garnered about 20% of its income from AAPL, while the revenue share in 2018 was 25%. Radio-frequency front end module, Bluetooth, and Wi-Fi are some of the components that it supplies to AAPL for the iPhones.
On January 23rd, AVGO announced that it would sell wireless components worth $15 billion to the iPhone maker. These components would be used over the next three and a half years in AAPL products. Apart from benefitting out of the iPhone 12 ‘supercycle,’ it also has other customers to fall back upon. Moreover, it has a more stable place in AAPL’s list of iPhone component suppliers owing to the multi-year deal.
AVGO’s revenue for the third quarter that ended September 2020 climbed 6% year-over-year to $5.8 billion, out of which 74% was product revenue. The company faced supply chain disruptions due to the pandemic and sales from AAPL during the quarter dropped. However, after the launch of the iPhone 12, AVGO is likely to see a strong rebound in sales in the fourth quarter. The consensus estimate indicates a 11.2% increase in the revenue for the quarter ending December to $6.4 billion. Meanwhile, EPS is likely to surge 15.8% during the quarter.
On a year-to-date basis, AVGO surged 14.9% to close yesterday’s session at $359.60. It is trading 7.8% below its 52-week high of $387.8. Over the past six months, the stock soared 37.1%.
It’s no surprise that AVGO is rated “Buy” in our POWR Ratings system. It also has an “A” for Trade Grade and Industry Rank, and a “B” for Peer Grade and Buy & Hold Grade. It is the #23 ranked stock in the Semiconductor & Wireless Chip industry.
QUALCOMM Incorporated (QCOM)
QCOM designs, produces, and markets communication-related chipsets in US, China, South Korea, and Taiwan. The widespread adoption of 5G networking is about to initiate an upgrade cycle and QCOM is likely to be at an advantageous position due to this. As the iPhone 12 is powered by 5G, it is imminent that QCOM’s 5G chipset would be in demand. AAPL has included millimeter-wave in all its new iPhone 12 models and this will give an added boost to QCOM.
In 2019, AAPL and QCOM ironed out their dispute and now the iPhones are powered by QCOM’s X55 modems. Legal documents indicate that AAPL would mix and match X65 and X70 modems for use in its 2022 and 2023 releases.
During the third quarter that ended in July 2020, QCOM’s revenue was flat at $4.9 billion. Its EPS dropped to $0.74 compared to $0.86 posted in the same period a year ago. For the fourth quarter, the company expects a nearly 15% year-over-year drop in handset shipments due to COVID-19, as well as a delay in iPhone 12 launch. The consensus estimate for the third quarter that ended September 2020 indicates 50% growth in EPS to $1.17. QCOM’s revenue for the third quarter is likely to increase 23.6% to $5.9 billion.
QCOM rallied 42.7% year-to-date to close yesterday’s session at $125.91. The stock soared 65.7% over the past six months because of strong financials and the imminent 5G wave that is all set to change the course of technology. In July, it also announced a long-term patent agreement with Huawei, and settled a major legal dispute.
It’s no surprise that QCOM 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)
NXPI is an American-Dutch semiconductor company that manufactures a broad range of Automotive Products Processor and Microcontrollers. The company has more than 35 companies as its clients and AAPL is one of its largest clients. Amongst the list of components that it supplies to the iPhone maker are near-field communication (NFC), controller, a Touch ID sensor, and the latest being a charging component.
Recently, the company also added an ultra-wideband chip (UWC) to this list. This chip is the unique component that gives NXP an edge over other suppliers for the iPhone. This chip, powered by short-range radio connectivity, scores high on security and accuracy. The UWC was first used by AAPL in its Apple Watch and iPhone 11.
NXPI, which earns 47% of its revenue from automotive chips, was badly hit during the COVID-19 crisis due to lower demand from automobiles. In its third quarter that ended September 2020, the company’s revenue edged 0.1% higher year-over-year to $2.3 billion. However, on a sequential basis, the revenue jumped 25%, indicating a strong rebound in its core markets. NXPI saw a particular improvement in automotive, mobile income, and industrial IoT. Analysts estimate the company’s revenue to surge 12.8% in 2021.
Over the past six months, NXPI rallied 42.9% amid optimism surrounding the demand for iPhone 12. The stock ended yesterday’s session at $133.23, gaining 6% year-to-date.
Hence, NXPI is rated a “Buy” in the POWR Ratings. It holds an “A” in Trade Grade and Industry Rank and a “B” in Peer Grade and Buy & Hold Grade. It is the #27 ranked stock in the Semiconductor & Wireless Chip industry.
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TSM shares were trading at $84.11 per share on Wednesday morning, down $2.60 (-3.00%). Year-to-date, TSM has gained 47.31%, versus a 3.27% rise in the benchmark S&P 500 index during the same period.
About the Author: Namrata Sen Chanda
Namrata is an accomplished financial journalist, with nearly a decade of experience. She specializes in interpreting news releases and framing investment strategies, and has worked with some of the leading companies in real estate, banking, insurance, mutual funds, financial research, fintech, and investment education. More...
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