Semiconductor suppliers and their exposure to Apple
In the previous part of this series, we saw that Apple’s (AAPL) suppliers are looking to diversify their customer bases as the handset maker brings more chip technology in-house. However, diversification won’t happen overnight, and suppliers with a heavy dependence on Apple will continue to face the seasonality effect of the iPhone cycle.
Cirrus Logic (CRUS), the audio chips supplier, earned 79.0% of its revenue from Apple in the fiscal year that ended March 2017. CRUS stock rose 87.4% in the last 12 months, whereas Apple stock rose 58.7% during the same period.
Skyworks Solutions (SWKS), the RF (radio frequency) chip supplier, hasn’t specified its exposure to Apple. But analysts estimate that its exposure is around 40.0%. SWKS stock rose 62.0% in the last 12 months. Qorvo (QRVO), Apple’s other RF supplier, is estimated to earn more than 40.0% of its revenue from the mobile giant.
On the other hand, large semiconductor companies such as Broadcom (AVGO) and Texas Instruments (TXN) earn more than 10.0% of their revenue from Apple, but they also have a diversified customer base. These stocks aren’t governed by Apple’s performance. In the last 12 months, AVGO and TXN stocks rose 56.6% and 34.9%, respectively, which were lower than AAPL’s gain.
A heavy dependence on a single customer exposes a company to big risks. These suppliers often trade at lower price multiples than suppliers with a more diverse customer base.
The PS (price-to-sales) ratio tells us the amount an investor is willing to pay per dollar of sales. CRUS and QRVO, which have high exposures to Apple, had lower PS multiples of 2.88x and 3.26x, respectively. On the other hand, AVGO and TXN, which have a diverse customer base, had higher PS multiples of 6.28x and 6.0x, respectively, as of June 8, 2017. Apple has a PS ratio of 3.67x.
The PB (price-to-book) ratio tells us whether the company’s equity is overvalued or undervalued compared to its book value. Book value is a conservative price, as a company’ research and development costs are included in its operating expense and are therefore excluded from the stock’s book value.
CRUS and QRVO had lower PB multiples of 3.88x and 2.01x, respectively. On the other hand, AVGO and TXN had higher PB multiples of 5.24x and 7.77x, respectively, as of June 8, 2017. Apple had a PB ratio of 6.03x.
That shows that a diverse customer base makes investors more optimistic about a company. Next, we’ll see Apple’s impact on its contract manufacturers.