Arie Goren

About the Author Arie Goren

Arie Goren is a senior global analyst at Sigma Wealth Management/ ANDBANK GROUP. He has 37 years of experience in the world financial markets specialized mostly in the American stock markets and commodities. Arie Goren has been writing many investment articles in important financial websites and financial newspapers like Seeking Alpha, Amigobulls, TalkMarkets, Born2Invest, Bizportal, Themarker, Calcalist, Globes and others. He has also developed very successful strategies for creating winning portfolios according to specific formulas. In January 2015, he was ranked among the world’s top 10 financial bloggers according to TipRanks, which holds financial experts accountable for their recommendations by disclosing their stock ratings since 2009.

Should You Invest in Apple Inc. (AAPL) or Its Suppliers?

Apple Inc. (NASDAQ:AAPL) has done very well in the last few years and has bright growth prospects ahead. The new iPhone 8 set to be launched in September could see significant demand and meanwhile, Apple’s Services business is growing fast. With Apple Music subscriptions and iCloud having grown in double digits year-over-year and Apple Watch sales almost having doubled from last year’s levels, momentum seems to be on Apple’s side.

However, all this good news might have been already taken into account in the pricing of AAPL’s shares. Although I believe that AAPL’s shares still have room to grow, it is tough to see them soaring another 53% as they have done during the last year. As such, investors who want to profit from AAPL’s success getting higher potential price appreciation might consider investing in shares of one of Apple’s providers.

Cirrus Logic, Inc. (NASDAQ:CRUS), the audio-chip maker, depends heavily on Apple. According to Cirrus Logic recent 10-K report, purchases from Apple represented 79% of the company’s sales in the twelve-month periods ending March 25, 2017, and 66% in the twelve-month periods ending March 26, 2016.  On the one hand, Cirrus can benefit strongly from Apple’s success. However, on the contrary, it is pretty risky to depend on one customer.

Skyworks Solutions Inc (NASDAQ:SWKS) has not delivered its exact exposure to Apple. However, it is believed that about 40% of its sales is going to Apple directly or indirectly.

Broadcom Ltd (NASDAQ:AVGO), could get large content gains in the coming iPhone 8 with its Wi-Fi and wireless charging chips, and its radio-frequency chips. According to its latest 10-K report, Apple accounted for more than 10% of its net revenue for the fiscal year 2016.

In the table below I have put together some basic valuation and growth parameters of the four companies to find out if one of them is a better investing candidate.

 

As the table clearly shows, the market is giving to the smallest company Cirrus Logic higher earnings per share growth rate and a lower PEG ratio. The average Cirrus Logic’s annual estimated EPS growth for the next five years is very high at 23.3% compared to estimated annual growth rate for Apple of 11.07%, and 16.47% for Skyworks Solutions and 15% for Broadcom. Also, the PEG ratio of Cirrus 0.62 is much lower than that of Apple 1.56, Skyworks 1.02, and Broadcom 1.08. Additionally, Cirrus price to sales, price to book value, and EV/EBITDA ratios are the lowest among the group. What’s more, Cirrus Logic’s Return on Capital parameters are much better than those of the industry median, the sector median, and the S&P 500  index parameters, as shown in the table below.

                                                                                Source: Portfolio123

Top Analysts’ Opinion

Best performing analysts, according to TipRanks, have given on average a Strong Buy rating to the four companies. However, they have offered a slightly higher upside potential to the target price to CRUS stock. According to TipRanks, the target price of top analysts of CRUS stock is at $72.75 indicating an upside of 9.51% to its close price on May 26, $66.43; the highest estimate is at $76 while the lowest estimate is at $70. The upside potential of AAPL stock according to the top analysts is 8.12%, of SWKS stock is 5.96% and 5.91% for AVGO stock.

Conclusion

CRUS stock has already gained 82% in the last year compared to 53% by AAPL, 60% by SWKS, and 58% by AVGO in the same period. Nevertheless, it has the highest appreciation potential albeit with greater risk due to its very high dependence on Apple as a customer. Since I believe in Apple’s strong growth prospects and in my view, all the four stocks look attractive, I recommend investors who share my opinion about Apple’s bright future to break up their investment among all the four stocks.

 

DISCLAIMER: I own shares of AAPL and AVGO, and I do not own shares of CRUS and SWKS right now. This article expresses my ideas and opinions. I believe that the information I have given in this article is from reliable sources and accurate. I recommend readers to do their research before making any investment decisions.