Apple will hold a media briefing to announce something or other on Sept. 9, but tech investors started their engines a long time ago. Not only are Apple shares (ticker: AAPL) up a nifty 28% this year, stocks of some of the more prominent suppliers to Apple have surged vastly higher. The rapid rise could be the set-up for a pullback in coming weeks.
Apple's business is always perceived as a make-or-break matter for a gaggle of suppliers, from chip makers such as Skyworks Solutions (SWKS) and InvenSense(INVN) to assemblers such as Hon Hai Precision Industry (2317.Taiwan).
The next iPhone, which is expected to have a larger screen, is predicted to meet with a massive consumer reception because it will close the gap in the size of the display with models from Samsung Electronics (005930.Korea) and other makers. In addition, Apple may discuss its first entry into the wearable technology market, with a device that the world has already christened the "iWatch."
The rhetoric is reaching epic proportions. Analysts at tech research firm Bluefin Research Partners last week wrote that other smartphone makers "are anticipating a massive disruption in the smartphone market when the iPhone 6 is introduced in September." Samsung and others are throttling their own production "in an effort to prevent an inventory build as demand shifts to the iPhone."
If history is any judge, the iPhone will go on sale about two weeks following the announcement. The release of the iWatch may not come until next year, according to Re/Code.
The day the new phones go on sale, the first so-called teardown of the new devices will show who won and who lost business with Apple. But already the results for the supplier stocks have been stunning.
RF Micro Devices (RFMD), a maker of wireless transceivers, is enjoying what Brean Capital's chip analyst Mike Burton two weeks ago called "an Apple-induced reinvigorated high-end market" with what is expected to be a much larger role in this model.
RF Micro shares are up 142% this year. Skyworks, another RF chip maker expected to benefit from the iPhone, has almost doubled this year.
Shares of wireless chip maker Avago Technologies (AVGO) surged Friday morning by 8%, following its fiscal Q3 report the previous day, in which the company's CEO, Hock Tan, said the company's chips for smartphones should see "very strong" growth next quarter because of "a new phone model and a North American smartphone customer."
The Street ran with that. Chip analyst John Vinh of Pacific Crest Securities wrote in a note to clients that he thinks the company has managed to double the amount it sells into the iPhone versus the prior model. Avago stock is up 55% this year and has more than doubled in the past 12 months.
OVERALL, LOSING OR WINNING,Apple leads to reversals of fortune.
OmniVision Technologies (OVTI), which makes sensors that power cameras in smartphones, last week beat earnings expectations only to see its shares slip. Pacific Crest's Vinh, the same fellow trumpeting Avago's gain, wrote that all the things that are going right for OmniVision can't offset losing the business in the latest iPhone, as he anticipates.
STMicroelectronics (STM), which has gotten its accelerometer and gyroscope sensors into various models of the iPhone and iPad in prior years, may be at risk of being designed out this time around in favor of InvenSense, wrote Credit Suisse analyst Achal Sultania in a note to clients last week. STMicro stock is up a mere 5% this year, lagging the market overall. InvenSense, meantime, is up 24% this year and almost 50% in the past 12 months.
Apple's legendary ability to throw a curve ball—introducing fingerprint sensors with the iPhone 5S, for example—stokes speculation that new technology will create sudden opportunities. NXP Semiconductors (NXPI), which already makes something for the iPhone 5S called a "sensor hub," may have expanded terrain with the new model.
The Financial Times reported Friday that the company is going to supply a new chip for "near-field communications," to turn the iPhone into the equivalent of a contactless payment card.
A more stunning example is GT Advanced Technologies (GTAT), based in Merrimack, N.H. The stock has surged 167% in the past 12 months after the company signed up Apple in October of last year. GT Advanced runs furnaces at a facility in Arizona that produce sapphire-based materials. That material is expected to be used to make the new iPhone's screen tougher, and perhaps the iWatch, too.
The company has received up-front payments of several hundred million dollars from Apple. The debate on the stock now is how fast production will ramp, whether Apple will give some business to a second provider, and, of course, how many units Apple will actually ship using the material.
If it has a hit with the iPhone, GT Advanced could find itself with a whole new market as sapphire spreads to copycat devices. In the meantime, it has clearly made the shares more expensive: From a forward P/E of 14 times last year, GTAT has risen to a recent 22 times.
The problem for all of these suppliers is their rise comes amid a surge in the benchmark Philadelphia Semiconductor Index of 21% this year. Those broad gains are in such stark contrast to the overall stock market that it seems to prep the group for some profit-taking.
Analysts are parsing their words very carefully. Craig Berger of boutique research house Hedgeye wrote last week that "The reality is chip stocks seem to want to move higher for now in the near-term," including "Apple iPhone-exposed chip suppliers like InvenSense" and others.
Hedging further, Berger added, "we are not saying these ideas all are our long picks, but these are names that could work in the near-term environment if the broader market and chip stocks run higher."
Big if.
One way to play the group is to dump the pricier names, buy the cheaper ones. Cheaper, based on next year's P/E, are RF Micro, NXP, South Korean chip maker SK Hynix (000660.Korea), and Micron Technology (MU). Pricier names include most of the above, plus contract assembler Advanced Semiconductor Engineering (2311.Taiwan).
Apple's next big thing could prove very lucrative for them all, but supplier stocks that have been bid up may need to cool off as anticipation peaks.